Aurelia Butler

German inflation may spike even higher than previously forecast this month with a rate just under 6%, according to the Bundesbank.About 1 1/2 percentage points of that will reflect a temporary cut in value-added tax and very low prices for travel-related services in 2020, the Frankfurt-based central bank said in its monthly report released on Monday.German inflation already hit a three-decade high of 4.6% in October, but that was always flagged as a prelude to an even faster surge in November. The latest data are due next Monday, a day before the highly anticipated consumer-price report for the euro area. An increase of the magnitude seen by the Bundesbank is likely to intensify focus on the European Central Bank in Germany, where inflation is a sensitive topic. The current surge — partly linked to spiking energy prices — has stoked public attention, with both the Council of Economic Advisers and national tabloid Bild warning on ultra-loose monetary policy.The Bundesbank predicts inflation will retreat in coming months. The travel-related element will “lapse in December and the VAT base effect in January.” That’s no all-clear however. German inflation “could remain well above 3% for a longer period of time,” according to the report. “For the core rate, values well over 2% are conceivable.” The Bundesbank also highlighted that a surge in market prices for natural gas will “probably only be passed on to consumers after the turn of the year.”The warning on inflation is more emphatic than the central bank’s previous mentions of a 5% peak. It coincides with the final days of coalition talks that are likely to see a new government under the leadership of Social Democrat Olaf Scholz.Those negotiations are considering raising the minimum wage to 12 euros ($13.5) toward the end of 2022. The Bundesbank warned that such an increase would “noticeably intervene in the lower pay ranges and would have non-negligible effects on higher wage groups,” increasing overall pressures.That’s relevant for the ECB. One reason officials have been able to classify the current inflation spike as “temporary” is that secondary effects have failed to materialize so far. A pickup in wages would be hard to ignore however.Other highlights from the Bundesbank report:©2021 Bloomberg L.P. More

The Bundesbank also warned that inflation in Europe’s largest economy was likely to stay well above 3% for some time and upcoming wage negotiations should deliver large increases.Germany’s economy boomed in the first half of the year as services reopened for business. But it has since slowed as its industry was hit by supply disruptions and builders found it increasingly hard to find workers, the Bundesbank said. This could be an ominous sign for the global economy given Germany’s crucial position in global supply chains and its role as Europe’s growth engine. “The economic recovery will likely take a breather,” the Bundesbank said in its monthly report. “From today’s standpoint, GDP could tread water in the autumn quarter of 2021.”The Bundesbank added inflation in Germany could come in just below 6% this month before easing next year as a 2020 VAT cut and other temporary factors fall out of the calculation.Still, the German central bank saw consumer prices growing by well more than 3% for a long time, with core inflation — which strips out energy and food — substantially above 2%.While wage talks yielded only small increases in the summer, actual earnings rose as workers who had seen their hours reduced due to the pandemic could increase them again.New contracts also came with higher salaries.”Macroeconomic conditions also point to stronger wage increases for collective bargaining agreements to be renewed in the near future,” the Bundesbank said.The ECB has said that the current surge in inflation is temporary and should not be met with a tightening of its ultra-loose monetary policy, which includes a sub-zero interest rate on bank deposits and massive bond purchases.But the Bundesbank’s outgoing President Jens Weidmann contradicted the ECB’ official line on Friday, warning of higher inflation expectations and wage growth. More

Chinese authorities have unveiled a raft of policy measures since early last year to support small businesses, which are vital for growth and jobs but which have been hit harder by the COVID-19 outbreak.”Recently, costs of small- and medium-sized enterprises have risen and difficulties in their operations have intensified,” the cabinet said, pointing to rising raw material prices, weak orders, high logistics costs and power cuts.Local authorities would provide relief funds for small firms that temporarily face difficulties but have long-term market potential, promising projects and competitive technology, alongside tax breaks for some firms, it said.The central bank would step up credit support for small firms, making good use of the annual relending quotas, it said.China would boost financing support for small firms by increasing annual relending quotas by 300 billion yuan ($47 billion), the cabinet said in September.China would crack down on illegal activities involved in hoarding and speculating on commodities prices while futures companies should help small firms hedge risks from sharp price changes, the cabinet said.($1 = 6.3813 Chinese yuan renminbi) More

The ECB outlined its climate and environment risk-related expectations a year ago but banks appear to be slow in adapting them and the supervisor has repeatedly called on lenders to pick up the pace.”Banks have taken initial steps towards incorporating climate-related risks, but none is close to meeting all supervisory expectations,” the ECB said in a statement.”Only one-third of banks have plans in place that are at least broadly adequate, and half won’t have completed implementation of their plans by the end of 2022,” it added.Banks have made progress in meeting ECB expectations regarding management bodies, risk appetite and operational risk management. But they are failing in areas like internal reporting, market and liquidity risk management, and stress testing, the ECB said.Less than one-fifth have developed key risk indicators to monitor while those banks which concluded that they are not exposed to climate-related risks all had significant shortcomings in their assessment, the ECB said.The ECB plans a full review of banks’ preparations along with the climate stress test in the first half of 2022.Climate risk is expected to be “gradually” incorporated into capital requirements, indicating that non-compliant lenders will eventually be forced to beef up their capital positions. More

On Frankfurt’s main shopping street the early Christmas window displays work hard to entice passers-by. But German consumers, worried about a recent surge in inflation, are cautious about spending their money. “I have felt it quite a bit,” said Maria, a 40-year-old social worker, who had put off buying jewellery and electronics because of higher prices. “I noticed when shopping with my mum that gold has gone up from €1,500 to over €1,700 [per ounce] in only one week.” German inflation, as measured by the harmonised index of consumer prices, rose 4.6 per cent in October from a year earlier — its highest level since shortly after the country’s reunification three decades ago. It is widely expected to exceed 5 per cent by December. Spiralling prices are a sensitive subject in a country where people’s approach to money is still haunted by the hyperinflation of the 1920s and 1940s that wiped out most Germans’ savings. The issue is rising up the agenda for the incoming government — still being formed after September’s election — amid criticism of the European Central Bank’s ultra-loose monetary policies. “Germany is a country of savers and the inflation debate is connected to the one about people feeling they are being robbed by these negative interest rates,” said Carsten Brzeski, head of macro research at ING. “Some parts of the country suspect the ECB just wants to protect indebted southern European countries and not to look out for their interests.”Lyn, a 33-year-old primary school teacher, said the higher cost of rent and energy was often discussed among colleagues at her school. “I try to shop more carefully now,” she said, adding that the rising cost of living “should be an issue for the next government” to tackle.Germany is not alone in confronting soaring inflation, which is running at a 13-year high of 4.1 per cent across the wider euro area. Prices are rising even faster in the US, where they increased 6.3 per cent in October from a year ago, the biggest jump for three decades.Once people started being vaccinated against Covid-19 and lockdowns were lifted, consumer and business activity rebounded and the supply of many items — from semiconductors to natural gas — struggled to keep up with demand, driving up prices. A rebound in energy prices is a big factor behind higher inflation. But global supply bottlenecks also mean there are not enough parts — such as semiconductors — to produce all the goods people want to buy. This pushed up producer prices at German factories by 18.4 per cent in the year to October — the highest level since 1951.An extreme example is the way shortages of new cars have boosted prices for older ones. In Germany, used car prices have on average risen €3,666, or 18 per cent, in the past year to a record high of €24,502 in October, according to AutoScout24, a leading sales site. “Prices are skyrocketing, our purchasing power is melting away,” warned Bild, the country’s top-selling tabloid newspaper last week. It suggested readers invest in property, shares or precious metals to protect their money from “Madame Inflation” — a reference to Christine Lagarde, president of the ECB.The central bank’s recent policies of negative interest rates and buying vast amounts of government debt have long been criticised and subject to legal challenges in Germany, where opponents warned it risked runaway inflation. Now prices are surging, those criticisms are growing.Otmar Issing, a German economist and former ECB executive, wrote in the Frankfurter Allgemeine Zeitung last week that the bank was “exposing itself to a high risk” by assuming inflation will fall next year and it will be able to continue buying bonds and keep rates low “on the assumption that employees would simply accept the inflation-related real wage losses”.Such frustrations were a factor behind Jens Weidmann’s recent decision to step down as president of the Bundesbank at the end of December, six years before his term as the head of the central bank expires, while warning his staff “not to lose sight of prospective inflationary dangers”.Many Germans keep their savings in bank deposits, on which they are paid almost no interest and for which banks increasingly charge them fees. The pandemic only accentuated this trend, as German household deposits increased by €214bn to more than €2.6tn since the crisis started in March 2020.But economists say an important explanation for German anxiety about rising prices stems from their conservative approach to money, which makes them more sensitive to an erosion of their purchasing power.Only about 15 per cent of Germans directly invest in the stock market, compared with about 55 per cent in the US and 33 per cent in the UK. In addition, fewer than half of German households own their own home — against two-thirds in the UK or US and eight out of 10 in Italy. So while asset prices have been soaring, many Germans have missed out.The country’s ageing population, in which the number of people aged 80 or over rose 4.5 per cent to 5.9m last year, is also vulnerable to the corrosive effect of inflation on savings and pensions.There are, however, several factors suggesting German inflation will fade next year. One is that the rebound in prices from last year’s temporary cut in sales tax will drop out of the inflation data by January. Restrictions announced last week to contain a record surge in coronavirus cases could also have a cooling effect on consumer spending and prices. German retail sales already fell 2.5 per cent in September from the previous month.Furthermore, negotiated wages rose only 1.5 per cent in the first six months of this year from a year earlier. Isabel Schnabel, a German economist on the ECB board, said last week: “We do not see any widespread wage pressure which could give rise to an undesirable wage-price spiral.”Yet Jörg Krämer, chief economist at Commerzbank, has predicted that German wages will rise 2.5 per cent next year and pointed to a commitment by political parties negotiating to form a new government in Berlin to raise the minimum wage by a quarter to €12 per hour. “This will also force many companies to raise the pay of those close to the minimum wage,” he said.If inflation stayed high, the German political debate was likely to heat up, warned Volker Wieland, a professor at Frankfurt’s Goethe university and adviser to the government: “If we had another year of 5 per cent inflation that would certainly become a topic in the political arena, and it would be difficult for the government, say the finance minister or chancellor, not to react to it.” More

The writer is co-founder of Absolute Strategy Research The world is witnessing probably the biggest shock to supply chains since British logistics consultant Keith Oliver is thought to have first coined the term in 1982.If companies respond by raising inventory levels to ensure they have adequate stocks of materials, then we should start to prepare ourselves for more volatile business cycles.Some argue that we are close to “peak” supply-chain stress. The US consumer’s demand for goods may soon begin to revert to its pre-Covid-19 trend as spending gradually rebalances from goods towards services. Moreover, global business survey indicators on supplier delivery times and component shortages are already at extremes. At such levels, these indicators typically revert to the mean (often rapidly). In Asia, inventories in countries such as Japan and Korea have grown faster than shipments over the past three months.The more supply and demand move back into balance, the more pricing pressures should abate, and inflation rates fall. In which case, now is not the time for central banks to get dragged into premature rate rises.This sanguine view is plausible, assuming that the post-Covid inventory imbroglio is just temporary.But the current level of supply-chain stress is on a different scale to the normal, cyclical experiences of the past 20 years. For example, recent data from the European Commission for the eurozone show the highest percentage of companies reporting shortages of equipment, raw materials and labour in forty years.Intriguingly — and also for the first time in almost forty years — the percentage of companies citing “shortages” exceeded the number experiencing “insufficient demand”. This is as important as it is unusual: supply constraints at present exceed demand constraints.Most policymakers have only known a world where demand has been limited and supply has been elastic. Whatever the demand, China has been ready and willing to meet it as the world’s supplier of last resort.The policy response to the pandemic has upset that balance. High levels of saving and government transfers during lockdowns have underwritten a dramatic rebound in global demand but failed to prepare supply, creating a bullwhip effect. Now it is supply that appears to be constrained and “inelastic”.That is a very different policy environment — one where restoring global equilibrium in the goods market becomes more difficult; where national output gaps take on more significance; and where ensuring sufficient local inventories of goods takes on greater importance for both countries and corporates.The longer the supply-chain crisis continues, the more inclined companies will be to rethink their business models. They may decide to invest more to reshore production; they may vertically integrate to take back control of their supply chains; they may start to over-order and carry higher inventory as they shift from a just-in-time to a just-in-case model.Adapting to these challenges will place additional demands on corporates’ free cash flow and balance sheets. And they could have macroeconomic consequences. Inventory build-up and depletion is a key driver of the economic cycle. The longer inventory levels stay elevated, the more volatile they could become — as could the business cycle.This supply stress is happening at a time when hyperglobalisation is on the back foot, be it from US-China tensions or from the pursuit of strategic autonomy as nations shift from social to economic distancing. There is also pressure from climate-transition policies to localise supply and labour markets remain exceptionally tight, too.Optimists argue that the just-in-time supply-chain model has come through the coronavirus crisis with flying colours. If nominal demand moderates, if economies rebalance from goods to services and if new supply comes on stream, then worries about inflation could disappear as quickly as they came. However, the risks are that the scale and duration of the Covid stress-test has already begun to challenge the old model. Supply chains have proved to be vulnerable — even if that has been caused by excess demand and under-investment. Supply-chain disruptions and increased inventory volatility may not be just a temporary bug. In which case, if nominal demand continues to grow faster than supply, then inflation is likely to stay elevated and spread to the labour market. The stakes for policymakers could not be greater.  More

The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’One of the big mysteries in the global economy is why, though inflation is making a strong comeback, long-term interest rates have barely budged in recent months.So far analysts have explained this odd market behaviour as a symptom of the pandemic, driven by fear of another surge in cases, or massive central bank asset purchases, or — above all — a belief that the current inflation spike is temporary.None of these explanations hold up well in light of recent data, but there is an explanation that does: the world is in a debt trap.Over the past four decades, total debt more than tripled to 350 per cent of global gross domestic product. As central banks dropped interest rates to their recent lows, easy money flowing into stocks, bonds and other assets helped boost the scale of global markets from the same size as global GDP to four times larger. Now the bond market may be sensing that the debt-soaked and asset-inflated global economy is so sensitive to rate increases that any significant rise is just not sustainable.Surely, if all the standard explanations are falling apart then something deeper must be going on. Despite the rising Covid caseload, fear of its economic impact has given way to the assumption that vaccines and new cures will turn Covid into a normal part of life, like the flu. Global data show consumers are back out shopping and going to restaurants at near pre-pandemic levels.At the crisis peak, the US Federal Reserve was buying 41 per cent of all new Treasury issues, but long-term yields stayed close to record lows even after the Fed and other central banks started signalling in early autumn their plans to wind down their purchases. Moreover, central banks are buying bonds of all durations, so why are rates now rising only for shorter-term bonds?This is where the inflation scenarios come in — either that the current spike will pass as pandemic-induced supply shortages ease, or that the world is entering an era like the 1970s, with inflation becoming embedded in the system and people’s psyches.Evidence is mounting that inflation is not as “transitory” as central banks have been insisting. Attention is focused on headline inflation, which hit a three-decade record of more than 6 per cent in the US last month. But core inflation measures — which exclude volatile prices such as food and energy, and serve as a better indicator of long-term trends — have spiked worldwide and are currently above 4 per cent in the US. Wages face long-term upward pressure as well: there are now more than six job openings for every unemployed American, a two-decade high.Earlier this year, there was reason to hope that a rise in productivity might endure, restraining inflation in the long run, but it has faded. Surveys show people working from home are putting in longer hours to generate the same level of output.Global bond markets are starting to price in expectations that higher inflation and growth will force central banks to raise short-term rates, starting next year. In fact, surging short-term rates are putting the world’s government bond markets on track for their worst year of returns since 1949.Yet the yield on 10-year government bonds is now well below the rate of inflation in every developed country. The market is likely intuiting that, no matter what happens in the near term to inflation and growth, in the long term interest rates can’t move higher because the world is far too indebted.As financial markets and total debts grow as a share of GDP, they become increasingly fragile. Asset prices and the cost of servicing the debt grow more sensitive to rate rises, and now represent a double threat to the global economy. In past tightening cycles, major central banks typically increased rates by about 400 to 700 basis points.Now, much milder tightening could tip many countries into economic trouble. The number of countries in which total debt amounts to more than 300 per cent of GDP has risen over the past two decades from a half dozen to two dozen, including the US. An aggressive rate rise could also deflate elevated asset prices, which is usually deflationary for the economy as well. Those vulnerabilities would explain why the market appears so focused on the “policy error” scenario, in which central banks are forced to raise rates sharply, tripping the economy and eventually pushing rates back down.In effect, the world is stuck in a debt trap, which suggests that while the refusal of long-term rates to rise significantly is new and unexpected, it may also be entirely rational. More