Aurelia Butler

Last week, US inflation numbers for December were released. They showed year-on-year inflation at 7 per cent, the highest rate in four decades. This caused much alarm. Much of it is based on an ill-conceived reading of the data, for three reasons.First, please ignore year-on-year measures. Whatever is driving price dynamics, these forces are liable to change fast and unpredictably.We know this because they have been changing fast and unpredictably already. Take this example: last February, consumer prices were a subdued 1.7 per cent higher than a year earlier. That was no good guide to the big jumps in prices in the months that immediately followed, which drove the year-on-year rate above 5 per cent (and will keep it there for some time even if monthly inflation comes right back down this month). It would have been wiser to look at the monthly rate of change (mea culpa: I did not). It was the fourth consecutive monthly price acceleration, showing a rapid change in inflation pressures, and it hit a rate of change that, if sustained, would on its own eventually push yearly inflation above 4 per cent.Because of this, the head-turning inflation data should not have been December’s, but that of September and October, when monthly inflation soared back up, high above sustainable levels, after decelerating from the early summer peak (see chart below). After that, high year-on-year numbers were arithmetically baked into the December release, and anyone professing to be shocked by the December numbers without pointing this out is not enlightening you (nor perhaps themselves).Second, what do we learn from the December release that is new?Most importantly, that overall inflation has been moderating fast. The (seasonally adjusted) monthly rate has fallen by half in the past two months. The same pattern holds for all the main subcategories — including food prices, and energy inflation has even turned negative — but one. The exception is commodities excluding energy and food, for which prices are growing at a stable but high rate.In particular, there is no pick-up in broad services inflation, which has also halved in the past two months. Non-energy services price inflation is stable; energy services price inflation is negative. Those who, like me, expect inflation to fall by itself do so because we do not think it is caused by excessive aggregate spending, but by the enormous and unprecedented shift of spending away from services towards goods. Nothing in the December numbers gives a reason to give up that belief. Those who fret about inflation are on the lookout for price pressures spreading from goods to services. There is not much to support that fear either.If we think that people will eventually allocate their spending between goods and services more or less like they did before the pandemic (or that global capitalism will soon enough adjust to any modest, permanent shift in their shares), then we should expect goods price inflation — which is all there is at the moment — to go away too. The important data release to wait for, then, is not for inflation but for gross domestic product: on January 27 we will get a sense of whether growth in the fourth quarter continued the tentative trend away from spending on goods and back towards services, which could be gleaned in the third quarter. As I have said before, reasonable disagreement on inflation must logically come down to different views on whether this will happen.A colleague has pointed out that 0.3 per cent month-on-month services inflation could still make for 3.7 per cent price growth over a year if sustained. That is true — but it is right on par for services inflation. For decades, overall inflation near 2 per cent has meant services prices rising at 3 per cent or more, and goods prices falling enough to bring the average down. My colleague Rana Foroohar made an important point in her column this week: if durable goods prices stop falling like they used to, this averaging will no longer work. But why should they? The factors Rana mentions — reshoring, 3D-printed manufacturing and decarbonisation — could shift up the cost of goods. But apart from a one-off shift, why should these reduce productivity growth in how we make goods? 3D printing, in particular, should boost productivity. In any case, once consumption patterns settle, so should normal sectoral inflation rates.Third, the fear of rising inflation is usually expressed as a fear of a wage-price spiral. So another string of US data releases — of wage data, showing average hourly earnings rising about 6 per cent year on year — have got people worried. Here too, things look different with the monthly changes — overall wage growth has come down sharply. But it is true that wages for ordinary workers (“production and nonsupervisory employees”) keep rising strongly.The fear is that as businesses face rising costs, they jack up prices. But wage pressure is not the same as cost pressure. The best measure of how much labour compensation is costing businesses is instead the Employment Cost Index, which includes non-wage compensation costs (such as benefits and health insurance). That did rise strongly in the third quarter, the latest available (look out for Q4 on January 28) — by 1.3 per cent in three months. Year on year the figure was 3.7 per cent. But we should note that this comes after a dip in compensation growth early in the pandemic: on average, employees only cost employers 6.2 per cent more than two years earlier. It also comes after decades of employee compensation failing to match productivity growth. To judge whether growth in employment costs constitute “pressures”, we should compare it with labour productivity. And if we merely match the (weak) growth in real output per hour worked of the past decade, which averaged 1.1 per cent a year, employers can, with no real cost pressure, absorb yearly labour compensation growth of 3.1 in a world of 2 per cent inflation. That is a conservative estimate; it ignores both that compensation has lagged behind productivity growth — so there is room to catch up — and that a high-pressure economy can help lift productivity growth.All this reasoning is based on the state of the US economy. Other economies have seen rising inflation but for different causes. In particular, Europe has not experienced the same extraordinary swing from services to goods spending, as OECD chief economist Laurence Boone has just highlighted in a recent blog post (see her chart below). There are other sources of inflation — Europe’s energy squeeze, above all — but there are clear signs that policymakers all over the world are now grappling with a goods price inflation very much made in America.Other readablesA pan-European public sphere is coming into being — or is it only a pan-EU one?Can the invisible hand still work — and what happens to its intellectual predecessor, Bernard Mandeville’s Fable of the Bees, if everyone is on Facebook?Numbers newsMy FT colleagues have put together a marvellous postcode tool where you can see how your very own high street fared in the UK’s pandemic.UK inflation, too, is at a record high. More

While investments in technologies like solar and wind farms, advanced batteries will generate jobs, the transition will also likely cause a loss of jobs and tax revenues in fossil fuel production, said the report called “No Pain, No Gain: The economic consequences of accelerating the energy transition”. “It’s by no means a way to say that we shouldn’t pursue transition or slow it down,” said Peter Martin, WoodMac’s chief economist. “This pain in the short-term will pay off in the long-term.” Benefits from limiting the rise in temperatures to 1.5 degrees Celsius, as called for by the United Nations, could boost global GDP, on aggregate by 1.6% in 2050, the report said. But actions required to spur the transition to keep temperatures from going above that level could cut 3.6% from GDP in 2050, resulting in the 2% hit, the report said. The impacts will not be felt evenly. China will feel about 27% of a cumulative $75 trillion economic hit to global GDP by 2050, while the United States will see about 12%, Europe will experience 11% and India about 7%.Economies such as Iraq that do not have financial reserves to invest in non-fossil fuel sectors could suffer the biggest losses in economic output, it said.Wealthy economies with deep capital markets that already have big investments in energy transition technologies, or a propensity to invest in new technologies, will be better positioned. France and Switzerland, for example, will likely enjoy a modest boost to economic growth.The economic benefits of the energy transition should start to show after 2035 and lost economic output would be eventually recouped before the century’s end, the report said. More

PARIS (Reuters) -Twitter must disclose details on what it does to tackle hate speech online in France, the Paris appeals court ruled on Thursday, handing a win to advocacy groups that say the social network does not do enough.The decision provides ammunition to campaigners elsewhere in Europe who want tougher controls to prevent the spread of racist and discriminatory content on Twitter (NYSE:TWTR) and other social media platforms.It upheld a ruling by a lower court last year that ordered Twitter to provide details on the number, nationality, location, and spoken language of people it employs to moderate content on the French version of the platform.The lower court decision also required Twitter to disclose any contractual, administrative, commercial and technical documents that would help determine the financial and human resources it has deployed to fight hate speech online in France.The appeals court said it confirmed, in full, the first ruling and said Twitter should pay 1,500 euros ($1,700) in damages to each of six plaintiffs, a copy of the ruling seen by Reuters showed. A Twitter spokesperson said the company’s top priority was to ensure the safety of the people using its platform, adding that the group was reviewing the court decision. The U.S. company declined to comment on the financial and operational implications of the ruling. Campaigners were jubilant, though. The six lobby groups that sued Twitter had maintained that only a fraction of hateful messages were removed from the platform 48 hours after they were signalled.’FORBIDDEN TO FORBID’ “I’m tired of this reign where everything is allowed and where it is ‘forbidden to forbid’,” said Marc Knobel, the president of J’Accuse! (I Accuse), one the groups, referring to a famous slogan spread on Paris’ walls during the 1968 protests. “We have to stop with this delusion: not everything should be allowed in our society.”The ruling sets France apart from countries such as Denmark, Britain and the United States, as the country’s stringent anti-racism laws allowed such litigation to succeed. In France, racism and anti-Semitism aren’t considered as opinions that can be held publicly, but as infractions. Global technology giants have been accused of doing too little to address online abuse. An upcoming EU regulation, the Digital Services Act (DSA), is slated to provide procedures for faster removal of illegal content, such as hate speech. Last May, Britain said a planned new law would see social media companies fined up to 10% of turnover or 18 million pounds ($25 million) if they failed to stamp out online abuses such as racist hate crimes, while senior managers could face criminal action.($1 = 0.8821 euros) More

(Reuters) -U.S. leveraged loan prices have surged to their highest levels since 2007 as investors snap up assets that will offer compensation while central banks start hiking interest rates. Leveraged loans are often taken out by companies with high levels of debt, usually with non-investment grade credit ratings, and are often used by private equity firms to fund their acquisitions of these companies. Unlike bonds, they pay a floating interest rate, which rises as underlying interest rates rise, making them attractive to investors at a time when central banks embark upon rate hikes.The U.S. Federal Reserve is expected to deliver a rate hike as soon as March to combat inflation at a 40-year high and markets are pricing in another three hikes by the end of the year.That has heightened demand for assets that pay out as rates rise, sending the price of the S&P/LSTA Leveraged Loan Index to its highest levels since July 2007 at 99.066 at Wednesday’s close, according to data from Refinitiv and S&P Global (NYSE:SPGI)’s Leveraged Commentary and Data.”There is the expectation of rate increases, which inevitably pushes more retail money into the asset class,” said Neha Khoda, credit strategist at BofA in New York. “Given the selloff we’ve seen in the rates market, that’s been prompting increased retail inflows into U.S. loan mutual funds.” Loan funds saw the highest inflows since 2013 at $1.84 billion for the week ending on January 12, according to Refinitiv Lipper data. Government bond prices have tumbled and yields have surged over the last month as markets have ramped up rate hike bets. Analysts also expect new leveraged loan issuance to slow slightly this year after a record year in 2021, a factor also expected to provide technical suppport to prices. The rally in leveraged loans contrasts with U.S. high yield bonds – often sold by similar companies – which are down around 1% this year, according to BofA. High yield debt pays fixed coupons so is more vulnerable to rising rates. Leveraged loans have outperformed junk bonds – often issued by similar borrowers – on an annual basis in only eight of the past 26 years and some of those years involved some level of Fed policy tightening, according to research firm CreditSights. After peaking in 2007, leveraged loan prices slumped sharply at the onset of the financial crisis. A subsequent era of low interest sent investors chasing higher yield assets in recent years, leading eventually to a surge in demand for leveraged assets and deterioration in protections known as covenants that give lenders additional control over what borrowers can and cannot do.”The point to understand about the loan market is that it’s not the same market as it was pre-GFC (global financial crisis),” Khoda said. “The documentation is worse, rating quality is worse, the issuer composition is worse.” More