Aurelia Butler

UK inflation is expected to rise to a 30-year high when December’s data are released on Wednesday as upward cost pressures are felt across the economy.Economists polled by Reuters forecast inflation to hit 5.2 per cent, the joint highest since the early 1990s and up from a decade-high of 5.1 per cent in November. They attribute the upward price pressure to higher energy costs, strong demand for most goods and services, and continued supply chain disruption. While economic forecasts are more uncertain than usual during the pandemic, most experts predict inflation will peak in April, prompting expectations that the Bank of England will increase its key interest rate several times this year.The December data will be the last before the BoE’s Monetary Policy Committee meets on February 3 to decide whether to increase rates again, following the 15 basis points rate rise to 0.25 per cent in December — the first in more than three years. On account of “the current elevated level of inflation”, Yael Selfin, chief economist at KPMG UK, is pencilling in three interest rate rises this year, which “would represent a shift towards a significantly tighter monetary policy stance”. Paul Dales, chief UK economist at Capital Economics, expects inflation to rise to almost 7 per cent in April when Ofgem, the energy regulator, will increase its default energy tariff price cap. If confirmed, that would be more than three times the BoE target of 2 per cent, which Dales thinks would justify four bank rate rises this year to 1.25 per cent. Most advanced countries, like the UK, are experiencing high inflation, reflecting surging global energy costs. In December, inflation rose at the fastest pace since 1982 in the US and was the strongest since the creation of the euro.In the UK, the energy consumer price index rose by a hefty annual rate of 26 per cent in November, contributing 1.5 percentage points to the overall annual rate and pushing up household bills and transport costs. Core annual inflation, which excludes energy, food and alcoholic drinks, jumped to 4 per cent in November, the highest in nearly 30 years. Trimmed mean annual inflation — the pace of price growth excluding the 5 per cent highest and lowest price changes — doubled in the five months to November to 3.4 per cent, according to calculations by the National Institute of Economic and Social Research. Consumer inflation is currently higher for goods than services, reflecting more intense supply disruption and robust demand. “Goods supply has been vastly outstripped by demand, with supply disruptions adding to the shortage,” said Paul Mortimer-Lee, Niesr’s deputy director. “The result is higher goods prices.”This is particularly the case for second-hand cars, whose price rose by an annual rate of more than 27 per cent in November, providing its largest contribution to inflation since the data was first recorded in 1989 as people sought alternatives to public transport while there was a limited supply of new cars. Prices of sports and camping equipment, for which demand has surged during the pandemic, rose at their fastest pace on record.Andrew Goodwin, economist at Oxford Economics, warned that disruption caused by the Omicron coronavirus variant “will delay the rotation in consumer spending back from goods to services”, possibly resulting in “further upward pressure on global goods prices in early 2022”.Prices are also rising for food which, together with energy prices, hit the poorest households hardest as those items account for a larger share of their spending. In November, the annual rate of food prices more than doubled from the previous month to 2.5 per cent. But even for the services sector, where demand has been limited by social distancing measures and fears of infection, inflation rose to 3.3 per cent in November, about double its pace in July, reflecting rising costs and wages. Prices of accommodation, such as hotels, have risen at a double-digit rate for most of the past four months. Inflation figures showed “further signs of broadening, including in services”, said Fabrice Montagné, economist at Barclays, adding to “pressure on the MPC to hike rates early, and possibly vigorously, this year”.High inflation is also geographically widespread, with consumer prices rising across all regions, according to Niesr data. London is experiencing the fastest increase in prices and Northern Ireland the lowest.

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The Bank of England expects inflation to fall “quite quickly” from the second half of 2022 and to keep falling in 2023 as the disruption of the pandemic to supply and demand wanes. Most economists expect a similar trend, with base effects contributing to a lower annual rate as prices this year will be compared with their high levels in 2021.

But inflation forecasts were continuously revised up throughout last year and some experts think price growth could remain high for longer than currently expected. “Higher commodity prices, supply chain disruption, an additional VAT hike scheduled for April 2022 and the continuation of the pandemic means consumer prices are likely to remain above the Bank of England’s target until 2024,” according to Niesr.   More

The British government should fix post-Brexit red tape over customs and trade processes and issue more visas to address labour shortages, according to the British Chambers of Commerce.The trade group, which represents tens of thousands of businesses across the UK, has raised concerns over disruption caused by the UK’s departure from the EU’s single market.In a wide-ranging report ahead of the “Brexit day” anniversary on January 31, the BCC calls for the UK and the EU to further streamline new customs and trade processes to reduce the burden of paperwork and prevent delays.This should include agreement over safety markings of industrial goods — where differences will exist with the EU — and a veterinary deal to ease restrictions on the trade of plant and animal products.The group also wants simplified, business-friendly rules on cross-border VAT to help UK companies trade with all countries in the EU.Shevaun Haviland, the BCC director-general who joined from the Cabinet Office last year, expressed concerns over how long the government was taking to fix the problems that Brexit had caused for companies. “At the time of the deal, it was like, ‘We’ve got some things to fix underneath it but we’ll get to that quite quickly afterwards.’ But we haven’t really been quick enough,” she said.Businesses were “getting used to” the new border rules, she added, but these were holding companies back because they were “costly and time-consuming . . . it’s just adding a lot of noise into the system. It hasn’t gone away.”The BCC said that new border controls on imports from the EU that are coming into force this year risked compounding supply chain problems, and urged the government to prioritise the flow of goods. The new rules introduced from January 1 had initially caused extra disruption — with industry sources telling the BCC that about 30 per cent of trucks were being turned back at Calais in the first week of this year — but Haviland said this had stabilised at about 10 per cent. The BCC called on the government to provide further financial help for companies needing to adapt to the rules by bringing back the SME Brexit Support Fund, which was set up to help small businesses handle the disruption and paperwork associated with leaving the EU, and increasing its maximum payments to more than £2,000. Haviland urged the EU and UK to reach an agreement on implementation of the Northern Ireland protocol. “Negotiations need to be finished as soon as possible . . . businesses just need to know, one way or the other, what is the outcome?” 

Shevaun Haviland, director-general of the BCC, said businesses were ‘getting used to’ the new border rules but added that they were hindering companies because they were ‘costly and time-consuming’ © Hollie Adams/Bloomberg

She also pointed to the need to reassess curbs on business travel and UK professional qualifications in the EU. Haviland added that BCC members were concerned about access to skilled workers, with labour shortages proving a “drag on economic growth” in the UK. The group called for extra visas “to try and relieve some of the tension in the system”.“It’s absolutely not asking for uncontrolled immigration,” she said. “We are just saying that in areas like hospitality, construction and manufacturing where there are pinch points, can we just sort out short-term visas, while people get skilled up to take those roles?”She said that companies were also worried about the rising cost of doing business in the UK, given soaring bills for energy, wages, materials and supplies. Businesses would need to put prices up as a result, she added.“The number one concern for businesses is inflation, even above labour shortages.” The BCC wants the government to delay the national insurance increase due to come into effect in April, and provide additional help for small businesses to cope with the increased cost of energy. “Let’s not lose it now, let’s not kill it. The green shoots are there, let’s see them flower rather than killing them.”The British government said that the EU-UK Trade and Cooperation Agreement allowed UK businesses to “trade freely with Europe” but they were having to adapt to new processes, for which they were being offered one-to-one advice through a free-to-use export support service. “Indications since January 1 are that traders and hauliers are adapting very well to the introduction of full customs controls,” a spokesman said. More

The writer is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global PolicyChina reported the largest monthly trade surplus in its history last Friday. At $94.5bn, this was the latest in nearly two years of record monthly surpluses even as Chinese consumption has stagnated.But while it may seem sheer good luck for China that its soaring trade surpluses came just in time to balance stagnant consumption, this misunderstands the relationship between domestic consumption and trade. Contrary to what many assume, the country’s burgeoning trade surplus is not a symptom of manufacturing prowess, nor is it evidence of a culture of thrift. It is instead a consequence of the great difficulty China has had in rebalancing its domestic economy and reining in its soaring debt.This is because the very conditions that explain stagnant domestic consumption also explain the rapid growth in Chinese exports relative to imports. This is true, by the way, not just of China but of all countries that run persistent trade surpluses. Whether they are high-wage economies, such as Germany and Japan, or lower-wage ones, like China and Vietnam, their international competitiveness is based mainly on the low wages their workers receive relative to productivity.But it is precisely the low wages relative to productivity that limit the ability of their households to consume a substantial share of what they produce. In all of these countries, households receive a lower share of gross domestic product than among their trading partners, which is why they also consume a lower share.This isn’t always a bad thing. In the 1980s, suppressing consumption allowed Beijing to direct huge amounts of newly-produced resources into much-needed investment. The result was rapid, sustainable growth as China built the infrastructure and manufacturing capacity it urgently needed.This, however, changed around 10-15 years ago, once China had begun to invest as much in property development and infrastructure as it could productively absorb. That is when the debt used to fund investment rose more quickly than the economic benefits of that investment, eventually leaving the country with among the fastest growing debt burdens in history.Beijing has known the solution to this problem for years. In order to control soaring debt and the non-productive investment it funds, it had to rebalance the distribution of income by enough that growth would be driven mainly by rising consumption, as is the case in most other economies. But this requires a politically-difficult restructuring of the economy in which a larger share of total income — as much as 10-15 percentage points of GDP — is transferred from local governments to Chinese households.This is why the trade surplus matters. In recent years, Beijing has tried to slow the growth in debt by reducing non-productive investment in property and infrastructure. This year, as we saw with Evergrande, Beijing came down hard on the property sector.If a rising share of China’s total income had been going to ordinary households, the resulting reduction in investment by property developers could have been balanced by a rise in consumption. But that’s not what’s happened. In the past two years, partly as a consequence of the Covid pandemic, growth in wages has actually lagged behind growth in GDP. The share Chinese workers have received of what they produce has declined rather than increased, and with it so has the share they are able to consume.This is why China’s monthly trade surpluses have nearly doubled in the past two years. Larger trade surpluses, driven by a declining household share of GDP, allow Chinese manufacturers to absorb weaker domestic demand without reducing output. Without these surpluses, Beijing would have to allow debt to rise even faster if it didn’t want factories to fire workers.Rising exports are usually a good thing, but for countries like China, rising trade surpluses are not. In this case they are symptoms of deep and persistent imbalances in the domestic distribution of income. Until the country is able to reverse these imbalances, something which has proven politically very difficult, these large surpluses are just the obverse of attempts by Beijing to control debt, and so they will persist.This matters greatly to a world wrestling with weak demand. For China to run surpluses of nearly 5 per cent of its GDP, the rest of the world must run deficits equal to an astonishing 1 per cent of its collective GDP. As Beijing struggles with its burgeoning debt and the difficulty of rebalancing domestic income, the rest of the world will have to continue absorbing China’s burgeoning trade surpluses. More

The world’s poorest countries face a $10.9bn surge in debt repayments this year after many rebuffed an international relief effort and instead turned to the capital markets to fund their responses to the pandemic. A group of 74 low-income nations will have to repay an estimated $35bn to official bilateral and private-sector lenders during 2022, according to the World Bank, up 45 per cent from 2020, the most recent data available.One of the most vulnerable countries is Sri Lanka, where the rating agency S&P Global last week warned of a possible default this year as it downgraded the country’s sovereign bonds. Investors are also concerned about Ghana, El Salvador and Tunisia, among others.David Malpass, World Bank president, warned that the “extraction of resources . . . by creditors” meant that “the risk of disorderly defaults is growing”.“Countries are facing a resumption of debt payments at precisely the time when they don’t have the resources to be making them,” he said.The increase reflects developing economies taking on more debt to cope with the economic and healthcare impact of coronavirus, as well as the rising cost of refinancing existing borrowings and the resumption of debt repayments suspended after the pandemic hit.About 60 per cent of all low-income countries need to restructure their debts or are at risk of needing to, and fresh sovereign debt crises are likely, the World Bank warned in economic forecasts published last week.Governments and companies in low- and middle-income countries issued bonds worth about $300bn each year in 2020 and 2021, more than a third higher than pre-pandemic levels, according to data from the Institute of International Finance, a financial industry association.The impending surge in repayments comes despite a pandemic-driven global initiative to relieve poor countries’ debt burdens, which proved a damp squib. The Debt Service Suspension Initiative, launched by the G20 group of large economies in April 2020, aimed to defer about $20bn owed by 73 countries to bilateral lenders between May and December 2020. But despite being extended to the end of 2021, just 42 countries got relief totalling $12.7bn, according to the Paris Club group of creditor nations which helped co-ordinate the initiative along with the World Bank and the IMF.Those countries must resume their repayments this year and start repaying debts that were suspended under the scheme.Meanwhile, borrowing costs are rising. In the first two years of the pandemic, interest rate cuts by big central banks made it relatively cheap for governments to borrow. But as investors expect that global monetary conditions will tighten later this year, it is becoming more expensive to refinance existing debts. Developing economies led by Brazil and Russia have been aggressively raising rates for several months to fight a surge in inflation. But in many countries interest rates are still below the pace of price growth, and cross-border capital is flowing out of emerging market stocks and bonds.“Market access is a wonderful thing to have when there is cheap money out there, but there might be a different view as conditions tighten,” said Ayhan Kose, head of the World Bank’s economic forecasting unit.Asset managers, economists and debt campaigners have all called for fresh action to relieve the debt burden on poor countries.“The problems of debt are mounting and the fiscal space of the developing world will continue to shrink. We really are at risk of another lost decade for developing countries,” said Rebeca Grynspan, secretary-general of the United Nations Conference on Trade and Development.Gregory Smith, emerging market strategist at M&G Investments, said: “Another debt crisis, however triggered, would have very strong impacts on countries with high debt levels . . . We have one or two years in which to design something to support countries falling into systemic crisis.”The most indebted nations could seek relief from a scheme intended by the G20 to replace the DSSI. The “common framework” obliges participating countries to first agree terms with bilateral creditors and the IMF, then to secure the same debt relief from private creditors.However, critics say this risks cutting off countries’ access to capital markets. Only Chad, Ethiopia and Zambia have applied and negotiations show little sign of progress.“You know what it means for a country to say publicly it has problems paying its debts,” Grynspan said. “The private sector will punish them. If a country has any choice, it won’t do it.”  More

TOKYO (Reuters) – The Bank of Japan is expected to upgrade its inflation forecast on Tuesday and acknowledge budding signs of change in the country’s deflationary mindset, as stubbornly high global commodity costs prompt more firms to raise prices.But with inflation set to remain below its 2% target, the BOJ will likely stress its resolve to maintain its ultra-loose monetary policy even as its global counterparts move toward exiting from crisis-mode policies.At its two-day meeting ending on Tuesday, the BOJ is widely expected to leave unchanged a -0.1% target for short-term interest rates and a pledge to guide long-term rates around 0%.In a quarterly outlook report due out after the meeting, the BOJ will probably slightly revise up its inflation forecast for the year beginning in April from the current estimate of a 0.9% increase, sources have told Reuters.Compared with its assessment in October, the latest report may emphasise rising inflationary pressure and a shift in the balance of risk on the price outlook, the sources said.”Japan’s inflation will gradually accelerate as a trend due to improvements in the output gap, and heightening medium- and long-term inflation expectations,” BOJ Governor Haruhiko Kuroda said in a speech last week.The central bank may also flag plans to conduct a thorough analysis on whether recent signs of quickening inflation would last.Inflation is creeping up towards the central bank’s target not because the economy is gaining traction but because of external factors, complicating matters for policymakers trying to explain how the recent price moves could affect future monetary policy.A spike in wholesale inflation and rising import costs from a weak yen have led to price hikes for a broad range of goods, hitting households at a time wage growth remains slow.Some analysts expect core consumer inflation to exceed 1.5% around April, as the drag from last year’s cellphone fee cuts taper off and past rises in oil costs push up electricity bills.With the rise driven by higher raw material prices, rather than a hoped-for uptick in domestic demand, the BOJ’s near-term priority is to avoid a transitory blip in inflation from fuelling market speculation of an early policy tightening.Discounting rising price pressures too much, however, could dampen public perceptions of future price gains and derail the BOJ’s efforts to fire up inflation to its target, analysts say.In debating the policy outlook, the BOJ will focus on whether wages would rise enough to give households purchasing power, allow firms to keep hiking prices and sustainably accelerate inflation, according to sources familiar with its thinking. More