Aurelia Butler

America’s inflation hawks are always prone to crying wolf. Since they spent the post-2008 years forecasting hyperinflation that never arrived, it was no surprise that so few people sat up when they issued the same warnings last year. Now the hawks are right but for the wrong reasons. The recent US inflation surge has little to do with the Federal Reserve’s easy money, as they claimed. Democrats should nevertheless resist letting their ingrained scepticism cloud their sense of self-preservation. Sustained inflation could ruin their chances of holding on to power.Historically, inflation has done far greater damage to leftwing governments than to rightwing ones, even when the blame should be evenly divided. Republican Richard Nixon did as much as his Democrat predecessor, Lyndon Baines Johnson, to stoke inflation in 1972 when he bullied the Fed chair, Arthur Burns, to cut rates in the build-up to his re-election. It was Jimmy Carter, a Democrat, who sent inflation-slayer Paul Volcker to the Fed, which contributed to Carter’s 1980 defeat. The beneficiary, Republican Ronald Reagan, tried unsuccessfully to get Volcker to cut rates in the build-up to his 1984 re-election. President Joe Biden’s reappointment of Jay Powell last week ought to reassure markets that he values the Fed’s independence. Powell withstood pressure from the Republicans’ Donald Trump to keep rates low before the pandemic.Yet popular wisdom — typified by Angela Merkel’s admiration for the “Swabian housewife”, suggesting balanced household budgets should be the model for national ones — will usually punish the left. In today’s case, with inflation hitting 6.2 per cent last month, America’s highest in a generation, Biden’s Democrats bear a lot of the blame. They made two errors that have come back to haunt them. The first was to pass a $1.9tn stimulus in March for which almost no economist was arguing. Since the US output gap — that between the economy’s actual and potential output — was around $400bn, the bill was huge overkill. It meant there would be too much money chasing too few goods, which is the most common driver of inflation. The bill was also politically short-sighted since it forced Democrats to pare down the size of their far smaller but more merited “build back better” investment legislation. History might view that stimulus as a seminal Democratic mistake.Biden’s second error was to bet that Covid-19 would fade with the vaccine rollout. Had that been the case, US consumers would have rushed out to spend their stimulus cheques on all the in-person services that were mothballed in the pandemic. But coronavirus did not vanish — partly because of the arrival of the more virulent Delta strain, but chiefly because a large minority of Americans refused to get vaccinated, or respect social distancing. Covid’s persistence meant consumers spent their expanded accounts on goods rather than services, which squeezed dollars into a narrower subset of normal consumption. Pandemic-related hits to the global supply chain did not help. But the primary culprit was the surge in demand.As is often the case, Democrats fell victim to wishful thinking. Biden cannot be blamed for the warped defence of “freedom” that has stoked so much anti-vaxxer resistance since he took office. Protesters wearing yellow stars to liken themselves to the Jewish victims of Nazism are an example of grotesquerie with which no US president can reason. But Biden could have been far tougher on the vaccine holdouts — and still ought to be. The White House could also do a better job of explaining why high inflation is something the left should fear far more than it does.Inflation’s frontline victims are those on fixed wages trying to save for their retirement, as well as retirees. After years of income stagnation, the US middle class ought to be enjoying the benefits of a tight labour market. But in spite of the highest wage growth in decades, inflation is even higher, which means blue-collar Americans are not feeling the upside to the recovering economy. Higher food and energy prices hit those who live from pay cheque to pay cheque the hardest. Inflation is good for debtors, which include America’s billionaire class, whose consumption is mostly funded by borrowing against unrealised capital gains. Contrary to leftwing folklore, higher inflation increases inequality, as the IMF has shown. Price stability is thus progressive. As Biden knows, US presidents have little power to influence inflation once it is out of the bag. The temptation is to float gimmicks to make it look as if he is acting. Biden’s move last week to release 50m barrels of oil from the strategic reserve was a triumph of optics over substance. The new supply would account for just over half a day of global consumption. Oil prices actually rose on the news. Keeping Powell in place was the right step, though the Fed chair has been stretching the word “transitory” (in relation to inflation) to breaking point.Which leaves Covid. Here is something Biden should have done already. Obvious steps include creating a federal QR identity for the vaccinated and stopping the unvaccinated from flying. The quicker coronavirus recedes, the faster America’s service sector will return to normal. The alternative could be higher Fed funds rates than are otherwise priced in. Faced with a trade-off, Biden should embrace the vaccine culture wars with zeal. [email protected] More

Turkey is going through a very unusual currency crisis. The collapse in the lira’s value — down by about a fifth over the past two weeks — has not been caused by problems in the country’s economic fundamentals as it has in the past. The country, which has long suffered from a current account deficit, posted a surplus for the second month running in September thanks to a huge surge in exports and a recovery in foreign tourist numbers. Instead, the currency’s troubles almost entirely reflect the increasingly erratic decision-making of one man and the influence he wields over the supposedly independent Turkish central bank: president Recep Tayyip Erdogan.Erdogan blames outside forces for the drop in the value of the lira. But the latest problems began in March of this year after he fired the head of the central bank Naci Agbal. The respected technocrat was the third governor to lose his job in two years. The appointment of the Erdogan-loyalist Sahap Kavcioglu led to the lira dropping 15 per cent shortly afterwards, before it recovered somewhat. The drop then became precipitous earlier this month after the central bank cut rates for the third time in as many months. It is true that emerging market currencies generally have performed badly against the dollar this year. Expectations that the US Federal Reserve will soon begin reducing its programme of asset purchases, designed to support the economy and the financial sector through the coronavirus pandemic, has led to an appreciation of the dollar. Footloose capital that has sought a higher rate of interest in developing countries is now returning home. As the Pakistani central bank governor said in an interview with the Financial Times last week, poorer countries with high levels of foreign currency debt are at risk if sentiment shifts. Against that backdrop Erdogan’s conspiracy-mongering and authoritarian tendencies play even more badly than usual. While he has long rallied against what he calls an “interest rate lobby”, he has also been a wily pragmatist, ultimately allowing the central bank to raise interest rates during previous episodes of currency volatility. This time, he appears determined to follow through on his ideological commitment to low interest rates, saying at the start of last week that Turkey was engaged in an “economic war of independence”.Opposition parties are optimistic that Erdogan is in his last years in power, and elections scheduled for 2023 will bring the vicious spiral to an end. Erdogan’s popularity is fading as higher prices eat into living standards. When he was first elected, his Islamist party promised an era of growth and steadily rising incomes. For many years he delivered, partly thanks to an IMF programme that his government inherited and, later, a construction boom that has now faded. Indeed, memories of that era of debt-fuelled growth may lie behind the president’s continued support for cheap money. That is just one tool out of many at his disposal to try to remain in power.The saga may have an even unhappier end. Inflation is already running at an annual rate of 20 per cent, which means real interest rates are around negative 5 per cent. If the president continues to pursue a programme of interest rate cuts then the lira will fall further and prices will inexorably rise. In those circumstances the only way for Turks to defend their savings will be to turn to a currency outside Erdogan’s control. Unless he suddenly changes course, the only question facing Turkey, a country with great potential, is how much longer the president will stay — and how much damage he can do before he goes. More

Is Turkey on the brink of hyperinflation? Turkey has thrown caution to the wind as the rest of the world frets about surging inflation. The country’s central bank cut its main interest rate for the third consecutive month to 15 per cent in November, despite the nation’s consumer price index rising 19.9 per cent year on year in October.On Friday, annual inflation is expected to cross the 20 per cent threshold to hit 20.7 per cent, according to a Reuters poll. That would represent its highest rate since November 2018, when the country was reeling from a currency crisis.Turks have been watching with horror while enduring a repeat of that episode in recent weeks, with the lira tumbling 28 per cent against the dollar since the start of November. Analysts warn that if President Recep Tayyip Erdogan refuses to abandon his fixation with low interest rates, Turkey could be headed towards hyperinflation. The country is heavily reliant on imports and other raw materials that are becoming increasingly expensive as the lira slides.“Headline CPI will likely close in on 30 per cent [year on year] over the coming months,” wrote Phoenix Kalen, analyst at the French bank Société Générale, in a recent note.“Headline CPI peaking at 27 per cent over the near term would be an optimistic scenario,” added Kalen. Laura PitelWill US job numbers increase the pressure on Powell to raise rates?Traders will be watching the US jobs report on Friday closely, as questions mount about the future direction of monetary policy at the world’s largest economy.In early November, Federal Reserve chair Jay Powell urged patience on interest rate rises as the US central bank said it would start unwinding its $120bn-a-month pandemic-era asset purchasing programme. Powell said it was “time to taper” because the economy had achieved “substantial” progress towards the central bank’s two targets of full employment and inflation averaging 2 per cent. But, he added, there was “still ground to cover to reach maximum employment”.Recent data now point to signs of a tightening labour market, with new applications for US unemployment benefits falling to their lowest level since 1969. A big jobs print could add to expectations of a rise in borrowing costs. US employers added 531,000 positions in October and Andrew Hunter, senior US economist at Capital Economics, expects “a solid 500,000 in November”.“But the growing risk of a winter Covid wave and a dwindling supply of available workers look set to weigh on employment growth” soon after, warned Hunter.Meanwhile, the core personal consumption expenditure index — the Fed’s preferred measure of inflation — rose 4.1 per cent in October, its biggest year-on-year jump since the 1990s and higher than the 3.7 per cent annual rise recorded for September. This has left the Fed with a tricky balancing act going into next year, said Brian Nick, chief investment strategist at Nuveen.Unlikely to raise interest rates while the US economy is still recovering from the pandemic, investors will soon find out “just how tolerant the Fed has allowed itself to become of higher inflation”, Nick said.“If ‘transitory’ was this year’s buzzword, next year’s will be ‘full employment’,” predicts Nick. George SteerWill eurozone inflation reach highest point since the common currency was introduced?Eurozone inflation for November is expected to have climbed at its fastest pace in 30 years on Tuesday. Such a rise would match a similar record reached last month in the US, as both economies face surging energy costs, strong consumer demand and supply chain disruptions.Economists polled by Reuters forecast annual eurozone headline inflation to hit 4.4 per cent in November. This would mark an increase from 4.1 per cent in October, and would be more than double the European Central Bank’s target of price stability at 2 per cent. It would also signify the highest rate recorded since the euro came into existence in 1999, and the fastest pace since 1991. Core inflation, which excludes energy and unprocessed food, is expected to rise to 2.3 per cent, the swiftest rate in more than a decade.“Headline inflation is set to remain high throughout the fourth quarter,” said Melanie Debono, economist at Pantheon Macroeconomics, “with transitory factors currently supporting the headline rate, such as higher energy prices, pent-up demand in services and supply side disruptions, that could prove more lasting than policymakers anticipate.” In line with the consensus, Debono has recently lifted her inflation forecasts for the eurozone but thinks that “markets are wrong on ECB tightening in 2022”.At its October meeting, there was a broad consensus at the ECB governing council that there were “no signs as of yet” of a pass-through from higher energy prices to wages, according to minutes published on Thursday. This means low underlying price pressure in the medium term while the new Covid-19 variant will perhaps add further downward risk to the eurozone economic and inflation outlook. Valentina Romei More