Evelyn Reynolds

The International Monetary Fund on Tuesday raised its 2024 growth outlook for the United Kingdom, saying falls in both inflation and interest rates would boost domestic demand.
The IMF’s brighter outlook comes as the country braces for the first budget under the center-left Labour Party for 14 years.
The IMF also on Tuesday trimmed its growth outlook for the euro zone in 2024 to 0.8% from 0.9%, forecasting stagnation in the bloc’s biggest economy Germany.

General view of the City of London skyline, the capital’s financial district, in October.
Sopa Images | Lightrocket | Getty Images

LONDON — The International Monetary Fund on Tuesday raised its 2024 growth outlook for the United Kingdom, saying declines in interest rates and inflation would boost domestic demand.
The IMF now sees 1.1% growth for the U.K. economy this year, up from a July forecast of 0.7%. The agency also reiterated its forecast for a 1.5% expansion in 2025.

Inflation in the U.K. came in at 1.7% in September, a decline from 11.1% in October 2022. Lower rates of services inflation and wage growth have led economists over the last week to forecast a faster pace of interest rate cuts from the Bank of England, forecasting the central bank will take its key rate from 5.25% at the start of the year to 4.5% by the end of 2024.
Economic growth has been tepid so far this year, coming in at 0.2% in August after flatlining in June and July.

The IMF’s brighter outlook comes as the country braces for the center-left Labour Party to this month deliver its first budget in 14 years. Prime Minister Keir Starmer has warned that the package will contain “tough” decisions in order to fill what he claims is a looming £22 billion ($28.5 billion) financing shortfall — a figure disputed by his predecessors in the Conservative Party — after Labour committed to slash net borrowing.
While Starmer has ruled out increases to some major taxes, including on income and corporations, a broader package of tax hikes is anticipated. Uncertainty over the budget weighed on consumer confidence readings in August, though the S&P Global UK Consumer Sentiment Index released Monday showed households were slightly more optimistic about their finances and more willing to make large purchases.

“It’s welcome that the IMF have upgraded our growth forecast for this year, but I know there is more work to do,” Finance Minister Rachel Reeves, who took office in July, said Tuesday. Labour has previously pledged to secure the highest sustained growth in the G7 group of nations and make higher growth the core focus of its policymaking.
On Tuesday, the IMF also trimmed its 2024 growth outlook for the euro zone to 0.8% from 0.9% previously, forecasting stagnation in the bloc’s biggest economy Germany. Analysts flag a multitude of challenges facing the German economy, including intense competition for the country’s autos and wider manufacturing products, along with higher energy prices and macro uncertainty weighing on its industrial production.
Among other so-called “advanced economies,” the IMF forecasts economic expansion of 2.8% in the U.S., 1.3% in Canada and just 0.3% in Japan, which has suffered from weak demand this year amid high inflation. More

Even as inflation measures have eased, the high price of goods and services across the U.S. economy continues to pose a burden for individuals, businesses and policymakers.
Since prices started spiking in early 2021, food inflation has surged 22%. Eggs are up 87%, auto insurance has soared nearly 47% and gasoline, though on a downward trajectory recently, is still up 16%.
So far, rising debt hasn’t proved to be a major problem, but it’s getting there. The current debt delinquency rate is at 2.74%, the highest in nearly 12 years.
Amid the swirling currents of the good news/bad news inflation picture, the Fed has an important interest rate decision to make at its Nov. 6-7 policy meeting.

A family shops for Halloween candy at a Walmart Supercenter on October 16, 2024 in Austin, Texas. 
Brandon Bell | Getty Images

Just because the Federal Reserve is nearing its inflation goal doesn’t mean the problem is solved, as the high price of goods and services across the U.S. economy continues to pose a burden for individuals, businesses and policymakers.
Recent price reports on goods and services, despite being a bit stronger than expected, indicate that the rate of inflation over the past year is getting close to the central bank’s 2% target.

In fact, Goldman Sachs recently estimated that when the Bureau of Economic Analysis later this month releases its figures on the Fed’s favorite price measure, the inflation rate could be close enough to get rounded down to that 2% level.
But inflation is a mosaic. It can’t be captured fully by any individual yardstick, and by many metrics is still well above where most Americans, and in fact some Fed officials, feel comfortable.
Sounding like many of her colleagues, San Francisco Fed President Mary Daly last Tuesday touted the easing of inflation pressures but noted that the Fed isn’t declaring victory nor is it eager to rest on its laurels.
“Continued progress towards our goals is not guaranteed, so we must stay vigilant and intentional,” she told a group gathered at the New York University Stern School of Business.

Inflation is not dead

Daly began her talk with an anecdote of a recent encounter she had while walking near her home. A young man pushing a stroller and walking a dog called out, “President Daly, are you declaring victory?” She assured him she was not waving any banners when it comes to inflation.

But the conversation encapsulated a dilemma for the Fed: If inflation is on the run, why are interest rates still so high? Conversely, if inflation still hasn’t been whipped — those who were around in the 1970s might remember the “Whip Inflation Now” buttons — why is the Fed cutting at all?
In Daly’s eyes, the Fed’s half percentage point reduction in September was an attempt at “right-sizing” policy, to bring the current rate climate in line with inflation that is well off its peak of mid-2022 at the same time as there are signs the labor market is softening.
As evidenced by the young man’s question, convincing people that inflation is easing is a tough sell.
When it comes to inflation, there are two things to remember: the rate of inflation, which is the 12-month view that garners headlines, and the cumulative effects that a more than three-year run has had on the economy.
Looking at the 12-month rate provides only a limited view.

The annual rate of CPI inflation was 2.4% in September, a vast improvement over the 9.1% top in June 2022. The CPI measure draws the bulk of public focus but is secondary to the Fed, which prefers the personal consumption expenditures price index from the Commerce Department. Taking the inputs from the CPI that feed into the PCE measure led Goldman to its conclusion that the latter measure is just a few hundredths of a percentage point from 2%.
Inflation first passed the Fed’s 2% objective in March 2021 and for months was dismissed by Fed officials as the “transitory” product of pandemic-specific factors that would soon recede. Fed Chair Jerome Powell, in his annual policy speech at the Jackson Hole, Wyoming summit this August, joked about “the good ship Transitory” and all the passengers it had in the early days of the inflation run-up.
Obviously, inflation wasn’t transitory, and the all-items CPI reading is up 18.8% since then. Food inflation has surged 22%. Eggs are up 87%, auto insurance has soared almost 47% and gasoline, though on a downward trajectory these days, is still up 16% from then. And, of course, there’s housing: The median home price has jumped 16% since Q1 of 2021 and 30% from the beginning of the pandemic-fueled buying frenzy.

Finally, while some broad measures of inflation such as CPI and PCE are pulling back, others show stubbornness.
For instance, the Atlanta Fed’s measure of “sticky price” inflation — think rent, insurance and medical care — was still running at a 4% rate in September even as “flexible CPI,” which includes food, energy and vehicle costs, was in outright deflation at -2.1%. That means that prices that don’t change a lot are still high, while those that do, in this particular case gasoline, are falling but could turn the other way.

The sticky-price measure also brings up another important point: “Core” inflation that excludes food and energy prices, which fluctuate more than other items, was still at 3.3% in September by the CPI measure and 2.7% in August as gauged by the PCE index.
While Fed officials lately have been talking more about headline numbers, historically they’ve considered core a better measure of long-run trends. That makes the inflation data even more troublesome.

Borrowing to pay higher prices

Prior to the 2021 spike, American consumers had grown accustomed to negligible inflation. Even so, during the current run, they have continued to spend, spend and spend some more despite all the grumbling about the soaring cost of living.
In the second quarter, consumer spending equaled close to $20 trillion at an annualized pace, according to the Bureau of Economic Analysis. In September, retail sales increased a larger-than-expected 0.4%, with the group that feeds directly into gross domestic product calculations up 0.7%. However, year-over-year spending increased just 1.7%, below the 2.4% CPI inflation rate.
A growing portion of spending has come through IOUs of various forms.
Household debt totaled $20.2 trillion through the second quarter of this year, up $3.25 trillion, or 19%, from when inflation started spiking in Q1 of 2021, according to Federal Reserve data. In the second quarter of this year, household debt rose 3.2%, the biggest increase since Q3 of 2022.

So far, the rising debt hasn’t proved to be a major problem, but it’s getting there.
The current debt delinquency rate is at 2.74%, the highest in nearly 12 years though still slightly below the long-term average of around 3% in Fed data going back to 1987. However, a recent New York Fed survey showed that the perceived probability of missing a minimum debt payment over the next three months jumped to 14.2% of respondents, the highest level since April 2020.
And it’s not just consumers who are racking up credit.
Small business credit card usage has continued to tick higher, up more than 20% compared to pre-pandemic levels and nearing the highest in a decade, according to Bank of America. The bank’s economists expect the pressure could ease as the Fed lowers interest rates, though the magnitude of the cuts could come into question if inflation proves sticky.
In fact, the one bright spot of the small business story relative to credit balances is that they actually haven’t kept up with the 23% inflation increase going back to 2019, according to BofA.
Broadly speaking, though, sentiment is downbeat at small firms. The September survey from the National Federation of Independent Business showed that 23% of respondents still see inflation as their main problem, again the top issue for members.

The Fed’s choice

Amid the swirling currents of the good news/bad news inflation picture, the Fed has an important decision to make at its Nov. 6-7 policy meeting.
Since policymakers in September voted to lower their baseline interest rate by half a percentage point, or 50 basis points, markets have acted curiously. Rather than price in lower rates ahead, they’ve begun to indicate a higher trajectory.
The rate on a 30-year fixed mortgage, for instance, has climbed about 40 basis points since the cut, according to Freddie Mac. The 10-year Treasury yield has moved up by a similar amount, and the 5-year breakeven rate, a bond market inflation gauge that measures the 5-year government note against the Treasury Inflation Protected Security of the same duration, has moved up about a quarter point and recently was at its highest level since early July.
SMBC Nikko Securities has been a lone voice on Wall Street encouraging the Fed to take a break from cuts until it can gain greater clarity about the current situation. The firm’s position has been that with stock market prices eclipsing new records as the Fed has shifted into easing mode, softening financial conditions threaten to push inflation back up. (Atlanta Fed President Raphael Bostic recently indicated that a November pause is a possibility he’s considering.)
“For Fed policymakers, lower interest rates are likely to further ease financial conditions, thereby boosting the wealth effect through higher equity prices. Meanwhile, a fraught inflationary backdrop should persist,” SMBC chief economist Joseph LaVorgna, who was a senior economist in the Donald Trump White House, wrote in a note Friday.
That leaves folks like the young man who Daly, the San Francisco Fed president, encountered uneasy about the future and hinting whether the Fed perhaps is making a policy mistake.
“I think we can move towards [a world] where people have time to catch up and then get ahead,” Daly said during her talk in New York. “That is, I told the young father on the sidewalk, my version of victory, and that’s when I will consider the job done.” More

The Biden administration rang up a budget topping $1.8 trillion in fiscal 2024, up more than 8% from the previous year and the third highest on record.
Interest expense for the year totaled $1.16 trillion, the first time that figure has topped the trillion-dollar level.

The U.S. Treasury building in Washington, D.C., on Aug. 15, 2023.
Nathan Howard | Bloomberg | Getty Images

The Biden administration rang up a budget deficit topping $1.8 trillion in fiscal 2024, up more than 8% from the previous year and the third highest on record, the Treasury Department said Friday.
Even with a modest surplus in September, the shortfall totaled $1.833 trillion, $138 billion higher than a year ago. The only years the U.S. has seen a great deficit were 2020 and 2021 when the government poured trillions into spending associated with the Covid-19 pandemic.

The deficit came despite record receipts of $4.9 trillion, which fell well short of outlays of $6.75 trillion.
Government debt has swelled to $35.7 trillion, an increase of $2.3 trillion from the end of fiscal 2023.
One aggravating factor for the debt and deficit picture has been high interest rates from the Federal Reserve’s series of hikes to fight inflation.
Interest expense for the year totaled $1.16 trillion, the first time that figure has topped the trillion-dollar level. Net of interest earned on the government’s investments, the total was a record $882 billion, the third-largest outlay in the budget, outstripping all other items except Social Security and health care.
The average interest rate on all the government debt was 3.32% for 2024, up from 2.97% the previous year, a Treasury official said.

The government did run a surplus in September of $64.3 billion, the product in part of calendar effects that pushed benefit payments into August, which saw a $380 billion deficit, the biggest month of the year.
As a share of the total U.S. economy, the deficit is running above 6%, unusual historically during an expansion and well above the 3.7% historical average over the past 50 years, according to the Congressional Budget Office.
The CBO expects deficits to continue to rise, hitting $2.8 trillion by 2034. On the debt side, the office expects it to rise from the current level near 100% of GDP to 122% in 2034.

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Retail sales increased a seasonally adjusted 0.4% on the month, up from the unrevised 0.1% gain in August and better than the 0.3% Dow Jones forecast.
Initial unemployment claim filings totaled a seasonally adjusted 241,000, a decline of 19,000 and lower than the estimate for 260,000.

Consumer spending held up in September, underscoring a resilient economy that is now getting a boost from the Federal Reserve, the Commerce Department reported Thursday.
Retail sales increased a seasonally adjusted 0.4% on the month, up from the unrevised 0.1% gain in August and better than the 0.3% Dow Jones forecast, according to the advanced report.

Excluding autos, sales accelerated 0.5%, better than the forecast for just a 0.1% rise. The numbers are adjusted for seasonal factors but not inflation, which rose 0.2% on the month as measured by the consumer price index.
In other economic news Thursday, initial unemployment claim filings totaled a seasonally adjusted 241,000, a decline of 19,000 and lower than the estimate for 260,000, the Labor Department reported.
Claims declined even following hurricanes Helene and Milton, which tore through the Southeast in recent weeks exacting tens of billions of dollars in damages. Filings in both Florida and North Carolina declined after jumping the previous week, according to unadjusted data.
Stock market futures were higher after the reports while Treasury yields also rose.
Together, the reports show that consumers, who power about two-thirds of all economic activity in the U.S., are still spending and the labor market is holding up after signs of weakening through the summer.

On the retail side, spending grew at miscellaneous store retailers, which showed an increase of 4%, as well as at clothing stores (1.5%) and bars and restaurants (1%). Those increases offset a 1.6% drop at gas stations as fuel prices fell, along with declines at electronics and appliances stores (-3.3%) and furniture and home furnishing businesses (-1.4%).
Sales increased 1.7% from a year ago, compared to the CPI rate of 2.4% for the same period.
The data comes from a month where the Fed cut its benchmark borrowing rate by a half percentage point and indicated more moves lower are likely this year and through 2025.
Policymakers have expressed confidence that inflation is on a glide path back to the Fed’s 2% target. However, they have expressed concern that the labor market is softening even with strong September payrolls growth and weekly claims that have stayed fairly in line after jumping due to the storm effects.
The European Central Bank on Thursday cut its key deposit rate by a quarter point, also expressing confidence in inflation along with concerns about a broader economic slowdown.
Despite the decline in initial filings, continuing claims, which run a week behind, edged higher to 1.867 million. Along with the declines in storm-ravaged Florida and North Carolina, claims decreased by an unadjusted 7,812 in Michigan, which had been hit by the Boeing strike.
The Philadelphia Fed also reported Thursday that its index of manufacturing activity rose to 10.3 for October, representing the difference between companies seeing expansion against contraction. The reading, up from September’s 1.3, was better than the estimate for 3.0. More