Aurelia Butler

LONDON (Reuters) – British consumer price inflation looks set to hit a 30-year high of 6% or more in April, but the big question for the Bank of England and the wider public is how quickly it will then fall back.The BoE last month became the world’s first major central bank to raise interest rates since the coronavirus pandemic hammered the global economy.Now investors are betting on as many as four more rate hikes in 2022, taking Bank Rate as high as 1.25%, because the rise in prices in Britain – as in many other rich economies – looks set to be less transitory than previously hoped.The inflation peak will hit the spending power of consumers just as they face a tax hike in April, challenging Britain’s economic recovery from its coronavirus crash of 2020.Bethany Beckett, an economist with Capital Economics, said household disposable income will fall in real terms this year, contributing to a slowdown in economic growth to 3.7% in 2022. The BoE in November predicted 5.0% growth this year. HOW LONG IS INFLATION LIKELY TO STAY HIGH?The BoE’s current forecasts, published in November, point to consumer price inflation of 3.5% in 2022 before a fall to 2.25% in 2023, close to the BoE’s 2% target.Then, after gas prices rose further, the central bank said in December it had raised its estimate for the peak in inflation to about 6% in April.That means the BoE is likely to push up its full-year inflation forecasts again on Feb. 3, alongside what many investors think will be another rise in Bank Rate to 0.5%.Households face a sharp increase of about 50% in their gas bills – or a bit less if the government moves to lessen the hit – in April, when a regulated price cap is due to be increased.Paul Dales, chief UK economist at consultancy Capital Economics, has almost doubled his inflation forecast for 2022 as a whole to 4.0% from a previous estimate of 2.2%.WHAT IS GOING ON WITH GAS PRICES?After their surge, gas prices have fallen recently.Britain is set to receive a record number of liquefied natural gas cargoes this month, helping to bring the day-ahead natural gas price down from a peak of more than 450 pence a therm in late December down to about 200 pence last week, although that was still much higher than its level of about 50 pence a year ago.Philip Shaw, an economist with bank Investec, said inflation in 2022 could end up at 2.5% if the recent fall in gas prices continues and leads to a cut in tariffs at a twice-yearly review by regulators due in October.WHAT ELSE IS DRIVING UK INFLATION?As well as the usual variables, from petrol prices to the impact of weather of food costs, another key factor for inflation this year is what happens to global supply chains, which were hit hard by the pandemic.This has been seen most starkly in the car market, where a shortage of microchips has curtailed production of new cars, pushing the price of second-hand models up by 27%.However, a survey of purchasing managers at British manufacturers last month showed an easing of prices paid for inputs from near record highs.But analysts are watching for the impact of the Omicron variant in China where a strict approach to stamping out coronavirus outbreaks led to the shutdown of suppliers vital for global manufacturers in 2020, pushing up prices. IS A WAGE-INFLATION SPIRAL LIKELY?The BoE’s main concern is not so much about what inflation does in the coming months but whether it triggers longer-term inflationary pressures, principally in wage settlements.Some companies have responded to a post-Brexit, post-COVID shortage of workers by pushing up pay for some roles.Food retailer Gregg’s this month brought forward a pay rise for its staff.A survey of manufacturers showed recent pay increases ranged between 2% and 3% but went as high as 14% in some cases, while 45% of firms had yet to agree a pay deal as they awaited more clarity on inflation and other factors. More

Hello and welcome to Trade Secrets. A quietish start to the new year as far as the renewal of trade war or the building of a durable peace is concerned, with only the will-they-won’t-they about a combative EU response to the China-Lithuania situation to keep us entertained. (Answer: they won’t.) India tried and predictably — you might say deliberately — failed in a stunt to demand a virtual ministerial meeting at the World Trade Organization on the subject of Covid-19 patents in an attempt to give that fading issue a bit of a boost. Today’s main piece looks at the supply chain issue, in which the return to normality has been postponed, and how hard it is to work out what’s going on. Charted waters this week focuses on China’s record trade surplus.Barometers of bottlenecksA return to supply chain normality deferred maketh the heart sick, as the Book of Proverbs in the Old Testament has it, almost. As we noted last week, it looked towards the end of last year as if the snarl-ups in ports and logistics across the world were easing somewhat. Freight rates were coming down, delays seemed to have peaked.Then came Omicron. China’s minimum-tolerance attitude towards Covid has amplified the new variant into big labour shortages in manufacturing, distribution and ports. It’s obviously a negative supply shock rather than the problem of excess demand that we continue to reckon has been the main issue. If we’re right — and assuming the Omicron wave subsides — the variant will delay and complicate but not short-circuit the improvement. But it remains possible that we’re wrong and indefinite supply-side problems will choke world goods trade.For those (exporters and importers, shipping lines, investors) who don’t have journalists’ luxury of watching and waiting, how will they know where we’re going? As usual, economists in investment banks and consultancies are quickly out of the traps with gauges and indices. The tricky thing is that these are untested against earlier episodes of supply chain seizures in similar circumstances, because there haven’t been any, and while you can observe outcomes it’s harder to isolate precise causes.The general sense of most indicators is that pressures and shortages looked like they were about to peak and then fall late last year, but instead stalled. One of the most sophisticated measures is from the New York Federal Reserve, described in this blog post, which weights together costs of cargo (airfreight, container shipping and bulk shipping) with manufacturers’ delivery times, backlogs and inventories.

Importantly for our purposes, the Fed measure also attempts to correct for the effects of higher demand in order to isolate just the supply-side issues. On the other hand, it’s only as good as the data you plug into it, and the use of The Baltic Dry index as an indicator for bulk freight costs will raise eyebrows among shipping types who have long warned it gets bounced around a lot by short-term factors.The consultancy Capital Economics has created a gauge for the G7 economies that also includes labour market shortages, which according to their measure looked even more worrying than product market shortages at the end of last year.

In November the White House created its own “dashboard” of indicators, but it seemed mainly designed to support the narrative that President Joe Biden had saved Christmas by getting ports going. (There’s a detailed rebuttal of that case by the Cato Institute’s Scott Lincicome here.)

The correlation of these indices to actual movements in trade volumes and prices remains unproven. The New York Fed economists promise a future piece relating the index to movements in inflation, which we’ll watch with interest. But data on goods trade arrives with a time lag and is volatile and prone to revision. Global trade contracted in the third quarter of last year, but as shown by the useful monthly index produced by CPB, a Dutch research institute, it recovered in October on both a monthly and three-month moving average basis.You also need to be very careful when looking at narrowly focused and high-frequency data points. As you can see from the White House dashboard, it looks to the untrained eye as if the infamous west coast port snarl-up was resolved in December as the number of containers in port suddenly plunged. In fact it was a new regime that charged carriers for containers sitting on the dock for more than eight days: the ports remained congested. The number of ships hanging around those ports has similarly dropped, but only because of a new queueing system requiring them to wait 150 miles out at sea. (You can go to the Facebook page of the Marine Exchange of Southern California and try to make sense of charts like this if you have the time.)

We’ll continue to monitor all these supply chain indicators, and chapeau to all the economists trying to make sense of it all. But we have to remember we’re trying to set a course through unknown territory that we’re mapping as we’re going along.Charted watersChina’s trade surplus soared to its highest level on record last year as a sustained boom in exports helped counter a loss of momentum across the country’s wider economy.

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The data, released on Friday, highlighted China’s dominance of global trade during the coronavirus era, during which its manufacturing industry has benefited from a shift around the world from services to goods consumption.Trade linksThe lockdowns and restrictions from China’s zero-tolerance Covid policy risk greater disruption than during earlier waves of the pandemic, the FT reports.The FT’s Claire Jones explains how Germany’s reliance on manufacturing has made it particularly vulnerable to supply chain disruptions.China’s trade surplus soared last year as it rode the recovery in global goods demand. The Trade Guys podcast from the Center for Strategic and International Studies looks at the latest in climate and trade, including proposed changes to the EU’s carbon border adjustment mechanism. An unusual Covid-related border dispute has the English football club Chester FC threatened with legal action for allowing fans to attend matches. Its stadium straddles England’s border with Wales, where lockdown restrictions are tougher. More

China’s zero-Covid policy goes far beyond social distancing and wearing masks in crowded places. It means closed highways and suspended flights, trains and bus services. China is taking tough action partly to forestall disruption to the Winter Olympics, which are less than three weeks away. That means trading much-needed economic growth for international prestige.China cut its policy interest rate on Monday for the first time in nearly two years, highlighting the dire economic backdrop. The 10 basis point reduction in the one-year loans rate bucks the trend in a region where increases have been gaining speed. It is a signal that the property downturn, power shortages and lockdowns are starting to inflict a bigger than expected hit on growth. China’s gross domestic product rose 4 per cent last quarter from a year earlier, its slowest pace in 18 months.Interest rate cuts typically presage more active measures from Beijing. Expect the government to increase infrastructure spending sharply. It may also pressure banks to loosen lending requirements to struggling companies. Property developers, caught in the crossfire of the Evergrande crisis, would benefit most.This creates a weaker outlook for banks, which are already wrestling with growing bad loans. The mainland-listed shares of China’s two largest banks — Industrial and Commercial Bank of China and China Construction Bank — have fallen a tenth in the past year, reflecting their growing burdens. On the flipside, a revival of strong infrastructure spending should help companies such as Sany Heavy Industry, Jiangsu Hengli Hydraulic and Anhui Conch Cement all recover. Their share prices have dropped 30 per cent in the past year, as property sector woes weighed on sentiment.Monday’s data releases also highlighted a key economic weakness. Chinese exports cannot be counted on to offset weak consumption caused by a zero-Covid policy. Overseas sales strength did lift its global trade surplus to a record $676bn last year. But exports accounted for just a fifth of 2021 GDP growth, while household consumption was two-thirds.The Olympics are becoming an expensive exercise for China. More