Aurelia Butler

US Treasury secretary Janet Yellen said controlling Covid-19 was key to taming inflation, as Joe Biden’s administration tries to stop rising prices derailing the US economic recovery and the president’s legislative agenda. “The pandemic has been calling the shots for the economy and for inflation,” Yellen said, speaking on CBS’s Face the Nation programme.“And if we want to get inflation down, I think continuing to make progress against the pandemic is the most important thing we can do.”Battling rising prices has become a focus of Biden’s economic team. Last week, the US consumer price index showed a 6.2 per cent gain in October from the previous year, its fastest increase since 1990.Yellen said many workers remained cautious about the risks of catching the virus in their workplace, and outlined shifting demands from consumers associated with lockdown and new remote working patterns. But she added that she expected spikes in the prices of goods such as used cars and petrol to abate by the second half of next year, if the pandemic is brought under control.White House officials have been trying to damp price pressures by exploring ways of easing some of the supply-chain bottlenecks, from semiconductor shortages to delays at ports, that are raising costs. Biden this week spoke to large retailers including Walmart and Target to discuss ways they could reduce price pressures.Yellen conceded that removing Donald Trump-era tariffs from Chinese imports “would make some difference” to inflation. “Tariffs do tend to raise domestic prices,” she said, but added that US trade representative Katherine Tai was “revisiting” the phase one trade deal with Beijing. Last month the US trade representative’s office launched what it said would be “frank” talks with Beijing’s trade officials to discuss the “phase one” deal reached in 2020. Many of Trump’s tariffs on Chinese imports remain in place. White House economic adviser Brian Deese on Sunday argued Biden’s $1.75tn social spending and climate bill would help control inflation by helping families with housing and childcare costs while offsetting its investments with tax increases on corporations and wealthy individuals. “Inflation is high and it’s affecting Americans and their pocketbook and their outlook,” Deese said.But Biden’s big spending bill has come under fire from Republican lawmakers who say it would fuel inflation. It has also been attacked by Joe Manchin, a centrist Democratic Senator who holds a key vote in a narrowly divided chamber, who has voiced concerns that the measures would raise prices even further. Deese told ABC News he was “confident” Biden’s package would be passed by the House this week and move on to the Senate.Inflation concerns are among the economic fears that have driven Biden’s popularity to new lows. A new poll by The Washington Post and ABC on Sunday revealed 70 per cent of Americans rated the economy negatively, including 38 per cent who said it was in “poor” condition. About half of Americans blamed Biden for high inflation.The poll contained disturbing signs for Democrats in next year’s midterm elections. It found that if those elections were held today, 46 per cent of voters would support the Republican candidate for Congress, against 43 per cent for the Democrat.The inflation worries also come at a time of potential transition for the US Federal Reserve, as Biden weighs whether to reappoint Jay Powell for a second term as chair or replace him. On Sunday, Yellen refused to be drawn on whether she supported Powell’s renomination.“I’ve said that I think chair Powell has done a very good job of running the Fed, of addressing the issues, particularly that arose when the pandemic struck,” Yellen said. “But what’s important is that President Biden choose someone who’s experienced and credible and there are a range of candidates.” More

The writer is a visiting professor at Columbia University The most egregious mistake made by a leading central bank in the pursuit of price stability has been the US Federal Reserve’s adoption of “average inflation targeting” in August 2020. The 2 per cent annual inflation target for the personal consumption expenditure price index, introduced in 2012, applied to the inflation rate in any given period and the anticipated inflation rates for all future periods. AIT — even the flexible variety favoured by most members of the Federal Open Market Committee — calls for a deliberate overshooting following episodes of below-target inflation, so as to ensure that average inflation rates are closer to the target. A 2020 statement by the FOMC commits it to achieving “inflation that averages 2 per cent over time”. But members of the Committee take different views of what that would mean in practice. Atlanta Fed president Raphael Bostic considers targeting four- to eight-year moving averages of assorted inflation metrics. His counterpart at the Cleveland Fed, Loretta Mester, mentions five-, six- or seven-year moving averages for PCE inflation, or even a fixed starting point rather than a moving average. St Louis Fed chief James Bullard considers a five-year window to be realistic, while Charles Evans of the Chicago Fed mentions an asymmetric five-year averaging, with no correction required for past overshooting of the inflation target. All these versions of AIT could mean many years of deliberately generated and quite unnecessary above-target inflation.Arguments for AIT generally start with the correct observation that, because of the extremely low level of the neutral real rate of interest, the effective lower bound on the Fed’s policy rates has become a binding constraint. As a result, inflation in the US has been below target consistently from the start of the financial crisis until the first quarter of 2021. Fear of the so-called Japanification of the US economy — a combination of deflation and anaemic growth — has been driving the Fed’s decisions until the recent overshooting of the inflation target put monetary policy tightening back on the agenda.It is bound to be the case that, when the economic system operates at the ELB for significant chunks of time, even the most effective pursuit of the conventional inflation target will generate an average inflation rate that is below target. Following the AIT approach of deliberately overshooting the inflation target (during periods when the ELB does not constrain monetary policy) is indeed likely to result in an average inflation rate closer to the target. But it would do so at the cost of higher average absolute deviations (and higher average squared deviations) from the target rate. Better to be below target when you cannot be on target and on target when you can be, than to be below target when you cannot be on target and above target when you could be on target!AIT is a form of price-level targeting. Yet basic economics teaches us that the price level is irrelevant. Actual and anticipated future inflation rates matter. Inflation is a tax on nominal assets and distorts relative price signals. Anticipated future inflation influences expected returns on a range of assets. Proponents of AIT care about past inflation, which can be indirectly relevant for monetary policymakers if there are causal relationships between it and the objectives of monetary policy. Contracts with lagged indexation clauses are one such channel. Past inflation can influence expectations of future inflation which can in turn drive actual current and future inflation. When he announced the adoption of AIT last year, Fed chair Jay Powell emphasised the inflation expectations channel. But there are other drivers of expected future inflation: past, present, and anticipated future money growth, forward guidance, expected and unanticipated changes in the monetary and fiscal policy regime, supply side developments, among many others. Even poorly informed economic agents will learn to identify episodes when the ELB is a binding constraint on Fed policy.Except in unlikely special cases, the role of past inflation in driving current and future inflation expectations, and through them actual current and future inflation, will not call for anything like an AIT rule. The choice of average inflation targeting is economically illiterate. Why should unintended and mostly unavoidable inflation targeting failures in the past justify future deliberate failures? And the cost of adopting AIT could be serious: future periods of unnecessary, deliberate above-target inflation. It is time to get rid of this potentially costly nonsense. More

Are real estate prices today the equivalent of bread prices? It’s a question that was recently asked by a trade union leader in Germany, where there has been a push to seize corporate-owned rental units and put them in public ownership. Many Dutch cities want to ban investors from buying cheap homes to rent out.South Korea’s ruling party took a beating in mayoral elections for failing to stop a 90 per cent hike in the average price of a Seoul apartment. China’s president Xi Jinping has made affordable housing a huge part of his common prosperity theme, saying that housing is “for living in, not speculation”.We know home prices are inflated in many places. But a new study from the McKinsey Global Institute, which tallies up the balance sheets of 10 countries that represent 60 per cent of global income (Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the UK and the US), has some eye-popping numbers about just how much money is in real estate, and why.The study, entitled “The Rise and Rise of the Global Balance Sheet”, looked at real assets, financial assets and liabilities held by households, governments, banks and non-financial corporations. It found that two-thirds of net worth is stored in residential, corporate and government real estate as well as land. For all the talk of digitalisation, it seems that bricks and mortar are the new bricks and mortar. How did this happen? And what are the implications?The McKinsey study found a strong inverse correlation between net worth relative to gross domestic product and five-year rolling averages of nominal long-term interest rates. The authors believe that declining interest rates have played a decisive role in lifting asset prices of all sorts, but particularly real estate prices. Constrained land supply, zoning issues and over-regulated housing markets also helped push up values. The result is that home prices have tripled on average across the 10 countries.The ramifications are troubling. For starters, asset values are now nearly 50 per cent higher than the long-run average relative to income. Net worth and GDP have traditionally moved in sync with each other at the global level, with some country-specific deviations. Now, wealth and growth are completely disconnected. This is, of course, behind much of the populist anger in politics today. Affordable housing in particular has become a rallying cry for millennials who can’t afford to buy homes and start families as early as a previous generation did.That, in turn, generates a headwind to consumption growth, since they aren’t buying all the things that you put in a house, either. But it also fuels inflation in rents, since so many people can’t afford to buy. That supports the idea that we could be heading into a 1970s stagflation era.Much of the disconnect between wealth and growth stems from too much money in real estate. But another aspect of the problem is that there’s just not enough money moving into more economically productive places. While higher asset prices accounted for about three-quarters of the growth in net worth from $150tn in 2000 to $500tn in 2020, savings and investment made up only 28 per cent of the increase in balance sheets.Given that investments such as infrastructure, industrial equipment, machinery and intangibles are what actually drive productivity and innovation, that’s very bad news. With the exception of China and Japan, non-real estate assets made up a lower share of total real assets in the 10 countries today than 20 years ago. What’s more, despite the fact that digital trade and information flows have grown exponentially over that time, intangibles are a mere 4 per cent of net worth.This may be because, as the authors observe, “for their mostly corporate owners, the value of intangible assets is assumed to decline rapidly due to obsolescence and competition, even if their value to society may have a much longer shelf life”. That’s a bit of a numbers game. The study notes that, by removing any depreciation of amortisation from the measurement of intangibles over the past 20 years, you would quadruple their value (which may actually justify the share prices of certain seemingly frothy technology stocks).Still, for all the talk of blockchain, cryptocurrency and big data, it’s rather amazing that most 21st-century wealth still lives in the oldest asset class of all: bricks and mortar. What lessons should we take from this? First, it seems increasingly clear that low interest rates haven’t done much for business investment. Second, and more encouragingly, the big government spending programmes of the post-Covid era present a new opportunity to try and push money into more productive sectors, which could ultimately bring wealth and growth back into alignment.Third, affordable housing is the most pressing economic issue of the moment. Technology-driven mobility and increasing work flexibility in the post-pandemic era may ease some of the pressure. More likely, we’ll need to rethink urban zoning and encourage more density, as California has already done. We will also have to find ways to tax property based on some combination of capital appreciation but also income, so as not to penalise pensioners. Only by fixing housing can we rebalance our global [email protected] More

Large internet platforms planning to set up headquarters, operating or research centres abroad should also submit a report to regulators, the Cyberspace Administration of China said in the draft rules. The document, published on the regulator’s WeChat account website, calls for requiring public comment on internet platforms formulating privacy policies or making amending rules that could significantly affect user rights and interests.Firms with more than 100 million daily active users would need to have changes reviewed by third-party agencies and obtain government approval.Companies that provide instant messaging services should, unless they have justifiable reasons, stop restricting users from accessing other or transferring files to other Internet platforms, the regulator said.The proposals, open to public review until Dec. 13., come as Beijing tightens its oversight over its technology sector with rules on how they should handle the vast troves of data they control, treat users and interact with rivals. China, which has recently passed laws on data security and personal information protection, is looking to set up governance rules for how firms use algorithms. It has also urged firms to stop a long-used “walled gardens” practice that prevents rivals’ links and services from being shared on their platforms.The agency in July proposed that companies with data for more than 1 million users should undergo a security review https://www.reuters.com/world/china/china-widens-clampdown-overseas-listings-with-pre-ipo-review-firms-with-large-2021-07-10 before listing shares overseas, just days after suspending the initial public offering of ride-hailing giant Didi Chuxing over alleged data violations. More

Will UK inflation hit the highest level in a decade?UK inflation is forecast to hit its highest rate in a decade in October as supply chain disruptions, rising energy prices and a tight labour market push the cost of consumer goods sharply higher.Consumer price growth will reach an annual pace of 3.9 per cent in October, a pick-up from the 3.1 per cent registered in September, according to a Refinitiv survey of economists. George Buckley, economist at Nomura, said ahead of a report from the Office for National Statistics on Wednesday that he expects inflation will climb further to 4.5 per cent in November and to reach a peak of 5 per cent in the spring of next year, in line with Bank of England expectations.After the spring, the BoE expects inflation to fall as the impact of higher oil and gas prices fades, the demand for goods cools and some of the raw material shortages ease.However, BoE governor Andrew Bailey said that the “crucial” element to judge to what extent inflation would be temporary, and thus the scale and the pace of the bank’s response, was the evolution of the labour market following the end of the furlough scheme in September. Valentina RomeiWill US retail sales accelerate into the holiday season?US retail sales are expected to have grown at a swifter pace in October than the previous month, as the industry prepares for what is expected to be a strong holiday season while navigating supply chain bottlenecks and worker shortages.Many Americans are getting their Christmas shopping done early this year in hopes of avoiding out-of-stock warnings closer to the holiday. Coupled with robust demand for Halloween items, the early holiday rush has probably given sales an autumn boost.Sales are on track to increase 1.4 per cent from the previous month, which would mark a rise from the 0.7 per cent September rise, according to a Refinitiv poll of economists ahead of the release of the monthly figures on Tuesday. The retail industry is scrambling to meet resurgent demand because congestion at ports and a shortage of truck drivers have created delays in the supply chain, raising the prospect that gifts will be hard to find.Mahir Rasheed, US economist at Oxford Economics, said tighter inventories — particularly for clothing and accessories — pose the “biggest risk to holiday spending, given that consumers may find fewer items available and may shift consumption to services or withhold spending until their preferred items are in stock.”Still, the National Retail Federation forecast that sales during the holiday season will hit a new record high. The trade group expects an 8.5 per cent to 10.5 per cent increase year on year, after sales jumped 8.2 per cent in 2020.That would indicate that spending will remain resilient against a big jump in consumer prices, thanks in part to strong savings and an increase in household wealth fuelled by property values. Matthew RoccoWill Turkey’s central bank risk another rate cut?The backdrop for the next meeting of Turkey’s monetary policy committee is not auspicious. Annual inflation is running at around 20 per cent. The lira, already down 25 per cent this year, is teetering on the brink of the symbolic threshold of 10 to the dollar. Global inflation fears have led other developed economies and emerging markets to either raise interest rates — or signal that rate rises are on their way.Yet analysts overwhelmingly expect the Turkish central bank to cut rates for the third month in a row on Thursday. The bank, which has faced heavy pressure from president Recep Tayyip Erdogan, a vehement opponent of high interest rates — is likely to slash its benchmark rate by 1 percentage point to 15 per cent, according to a Bloomberg survey of economists. Such a move risks heaping further pressure on the lira and accelerating inflation in a country that is heavily reliant on imported energy and goods.Per Hammarlund, chief emerging markets strategist at the Swedish bank SEB, says that the sensible thing to do would be to pause the easing cycle and allow inflation to fall before resuming. But he expects the bank to cut regardless. In that scenario, he said, “there is only one way for the [lira] to go and that is lower.” He added: “The only question is how fast it will weaken.”A dissenting voice was HSBC, which suggested that the central bank could opt for a temporary pause in its rate cutting cycle given the sharp lira depreciation over the past week. It added, however, that it remained convinced that the central bank has “tolerance for further lira weakness” and will continue to cut rates in December and beyond. Laura Pitel More