Raphael Stevens

It is easy now to point to phenomena that were features of the zero-interest-rate age. Ape jpegs selling for millions of dollars; algorithms pricing and buying homes; 20-something tech workers making “day in the life” TikToks that consisted entirely of them making snacks. Record-breaking profits at investment banks appear to be another relic of the golden age. Workers hired to meet roaring demand have been left twiddling their thumbs. Now they are being shown the door. Ahead of releasing their second-quarter earnings, institutions on Wall Street are trimming staff. Goldman Sachs culled 3,200 in the first quarter; on May 30th reports suggested the bank was letting go of another 250—this time mostly from among senior ranks. Morgan Stanley fired 3,000 or so in the second quarter. Bank of America has cut 4,000 and Citigroup 5,000. Lay-offs are also plaguing less glamorous bits of finance. Accenture and kpmg have both swung the axe. This matters not only for the poor souls handed their belongings in a cardboard box, but for the city of New York. Just as tech lay-offs have hurt San Francisco, so finance lay-offs will hurt the Big Apple. According to Enrico Moretti, an economist at the University of California, Berkeley, each of the “knowledge jobs” that make cities like New York and San Francisco successful in turn supports another five service roles—some high-paying (like lawyers), others less so (like baristas). Even if there are not additional firings, Wall Street’s retrenchment will take a toll. According to New York’s state comptroller, the average bonus pool shrank by one-fifth in the last financial year, the biggest drop since the global financial crisis of 2007-09.Although banks did not balloon quite as much as tech firms during the covid-19 pandemic, when online activity surged and working patterns seemed ready to change for good, the axe is cutting almost as deep in places. Meta’s workforce nearly doubled in size between 2019 and 2022; the firm has since let go about half of new additions. Goldman’s workforce expanded by just over one-quarter between the end of 2019 and the end of 2022, from around 38,000 to just over 48,000. By laying off some 3,450 people the firm has unwound one-third of this increase. Other banks have been a little slower to scale back. At Morgan Stanley, where employment also leapt by one-third over the same period, just one-eighth of the increase has been unwound. It is a similar story at Citigroup. There have yet to be major lay-offs at JPMorgan Chase, the king of Wall Street. Altogether, job losses might slow New York’s economy a tad—perhaps the market for TriBeCa lofts will cool—but they will hardly prove a fatal blow to a city of its size and vitality. Yet perhaps there is further for the story to run. Tech-industry lay-offs got going in earnest in 2022, when almost 165,000 jobs were lost. They are now coming thick and fast. Since the start of the year, more than 210,000 jobs have been cut. History suggests that firing seasons build momentum. It took years for banks to downsize in the wake of the global financial crisis. Just as with the tech companies, lay-offs would need to be several times bigger to return financial firms to their pre-pandemic sizes. Although banks are trimming the fat, they do not yet look lean. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Turkey’s economy does not obviously inspire emulation. Over the past five years it has been battered by soaring annual inflation, which hit 86% in October. The central bank is fresh out of foreign reserves, having spent most of them propping up the lira, also to little avail: last month the currency plummeted to an all-time low against the dollar. To make matters worse, Recep Tayyip Erdogan, Turkey’s president, is about to make good on some expensive promises following an unexpected election victory in May. The bill will probably plunge the government, which had been reasonably fiscally sensible until now, deep into the red. This chaos reflects the upside-down monetary policy pursued by Mr Erdogan. He insists that lowering interest rates is the key to fighting inflation, rather than tightening the screws, which is the solution favoured by generations of orthodox economists. To explain how this could be the case, Turkish officials invoke names ranging from Irving Fisher (an economist, and the finance ministry’s preferred guru) to God (Mr Erdogan’s policymaker of choice). Since the election Turkey’s monetary policy has become a little more reasonable, as interest rates have been raised. This has not stopped Mr Erdogan’s ideas catching on in the finance ministries of the developing world. “I truly wonder whether classical theories are the way to continue,” muses Ken Ofori-Atta, Ghana’s finance minister, who is one of several African ministers pondering such ideas. “We have to get rates low and growth going,” shrugged another at a recent summit on green finance in Paris. In the past month, officials in Brazil and Pakistan have expressed similar sentiments. Rather than looking at sky-high inflation, a floundering currency or fleeing investors, these ministers focus on Turkey’s gdp growth, which has been remarkably resilient, reaching 5.6% last year. They are sceptical of warnings that such a state of affairs is unsustainable, owing to stalling productivity, which ultimately determines long-run growth, and depleted foreign reserves. Some reasons for supporting ultra-loose policy when inflation is out of control are much older than Turkey’s experiment. Inflation eats away at the value of official debts, which weigh down developing countries. Letting prices run wild is an appealing option when a government has borrowed too much, even if it is also the surest path to hyperinflation and a currency crash.Other reasons are newer and come from Mr Erdogan. The Turkish president insists that in emerging markets, loose policy helps quell inflation. For countries that want firms to have access to cheap credit, in order to stimulate industrial growth, this is an appealing idea. One argument put forward is that less expensive borrowing will mean lower consumer prices. Another is that it will boost exports, which may replenish foreign reserves. The problem with both arguments is that the economic activity boosted by low rates also buoys wages and makes firms optimistic about future prices, entrenching inflation. Low rates on government bonds also send foreign investors fleeing, whacking the currency. It is nevertheless true that monetary policy works differently in emerging economies. Foreign investment matters more for market rates; aggregate demand matters less. In a recent paper Gita Gopinath, the imf’s chief economist, and co-authors find that emerging markets’ policy rates have next to no impact on their real economies. Looking at 77 developing countries since 1990, the researchers find that, just as in advanced economies, central banks raise the domestic rate at which they lend to local banks when inflation gets going. Unlike in advanced economies, banks do not pass the rate change on to government and household borrowers. To understand why, consider how banks borrow. Emerging-market financial institutions struggle to find funds at home, since few households save and there are not many big firms. Instead, they turn to international markets. Counterintuitively, the risk premium demanded by foreign financiers tends to fall when inflation is rising, since at such times economic growth tends to be strong. This balances out the impact of central-bank rate rises.Nor are international markets the only force with which policy must contend. Poor countries are also home to big informal sectors, where firms do not borrow from banks. The un and imf reckon that over 60% of the developing world’s workforce, and more than a third of its gdp, is off the books. Although informal lenders eventually match banks’ interest rates, this takes time. And informal labour markets are flexible, meaning workers’ pay rather than employment adjusts when rates rise. According to the Bank for International Settlements, a club of central banks, this means emerging economies take longer to feel the pinch of higher rates.Murky marketsInformal finance gives people an escape from the banking system. Your columnist was recently in Ghana, where she was told by an informal lender, who takes luxury cars as collateral, that business has boomed since the country’s latest debt restructuring, which wiped out much of the government’s domestic borrowing and almost took the banking industry with it. Unsurprisingly, trust in formal banks is low. The boss of one of the Accra’s biggest banks says other firms are safeguarding against the fallout from another similar episode by stockpiling dollars off the books.The problem comes with assuming Mr Erdogan’s policies will help. If high rates are diluted by foreign lenders and informal borrowers, so are low ones. Ms Gopinath’s research is reason to doubt ultra-doveish monetary policy can produce growth, but it does not support the idea that it can cut inflation, either, contra Mr Erdogan. If she is correct, officials need to focus on cutting the risk premium on foreign borrowing to strengthen the impact of monetary policy on the economy. To do this, they must convince investors to take them seriously, which means keeping deficits in check and finances stable, not jumping on the bandwagon of outlandish theories. Mr Erdogan’s experiment is best left in its trial phase. ■We’re hiring (June 12th 2023). The Economist is looking for a Britain economics writer, based in London. For details and how to apply, click here. Read more from Free exchange, our column on economics:The working-from-home illusion fades (Jun 28th)Can the West build up its armed forces on the cheap? (Jun 22nd)Wage-price spirals are far scarier in theory than in practice (Jun 15th)Also: How the Free Exchange column got its name More

China’s communists see themselves as a “vanguard party”, full of dedicated social warriors. Less than 9% of the country’s adult population are members, according to figures released on June 30th. Gaining entry can take years. Even Xi Jinping, the party’s boss, was not admitted until his tenth attempt. Aspiring members are often made to attend ideology classes, take written tests, submit “thought reports”, demonstrate their worthiness through community service and survive an interview by a panel of members. Is it worth the bother?The answer might seem obvious. “Virtually every influential position in China is held by a party member,” as Bruce Dickson of George Washington University has noted. Leaks like the Panama papers have revealed the offshore riches accumulated by the families of party leaders. And Chinese social media will occasionally erupt over indiscreet displays of wealth or privilege by members, like the boss of a PetroChina subsidiary, spotted strolling through a Chengdu shopping district in June holding hands with a fashionable younger employee who was not his wife. Yet changes in the party and the economy may be eroding the material benefits of membership.Party members can be found at every rung of the economic ladder. Of the poorest tenth of Chinese households, about 14% contain a party member, according to the China Household Finance Survey by Southwestern University of Finance and Economics. A third of members are farmers and workers (down from two-thirds in 1994). Since becoming head of the party in 2012, Mr Xi has urged cadres to adhere to a less hedonistic lifestyle. “Incorruptibility is a blessing and greed is a curse,” he advised in a recent speech. In work published in 2019, Plamen Nikolov of Binghamton University and co-authors calculate a 20% wage premium for members over similar workers. One reason, according to other research, may be that card-carrying communists are more likely to get jobs in state-owned enterprises (soes) and official institutions. Figures released in May show urban soes last year paid 89% more than private firms in cities. This gap has grown during Mr Xi’s reign. But as any well-trained communist knows, true economic clout derives not from labour but capital. So how does party membership affect the assets people own, such as their stocks, bonds and property?Recent research by Matteo Targa of diw Berlin and Li Yang of the Paris School of Economics reaches a surprising conclusion. The two economists look at the urban wealth distribution, as documented by the China Household Finance Survey. In each wealth bracket, some fraction of households include party members. If the fraction were to increase by one percentage point, what would happen to that bracket’s wealth? Messrs Targa and Li calculate that at the lower rungs of the wealth distribution, party membership makes a substantial difference. At the tenth percentile, for example, a one-percentage-point increase in party-membership rates would increase wealth by almost 0.9% (see chart). But the higher up you go, the weaker the financial rewards seemingly offered by membership. For households at the 93rd percentile and beyond, party membership makes no discernible difference at all.One reason for this divergence is property. Among the middle and upper echelons of Chinese society, almost everybody now owns a flat, whether they are a member of the party or not. And so everyone in these wealth brackets has benefited from the long real-estate boom that ended in 2021. Home ownership is, unsurprisingly, patchier among people on the lower rungs of the ladder. For these households, party membership may be a decisive factor governing whether or not they own a flat. In the five years since the household-finance survey was carried out, home-ownership rates in China have risen further. House prices have also recently fallen in cities, narrowing the gap between the propertied classes and everyone else. Both of these trends probably mean that becoming a communist confers less of a material benefit than it did five years ago, let alone 20 years back. Thanks to these economic forces, Mr Xi may get the more ascetic cadres for which he has been looking. His purges and rectification campaigns have abolished some of the perks of party membership. His mishandling of China’s property market may have helped, too. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

IN LATE JUNE Robert Friedland, the bombastic boss of Ivanhoe, a Canadian miner, warned that the world was running the risk of a “train wreck”, when a crunch in copper supply would derail the energy transition. The metal is used in everything from wiring to wind turbines—and green mandates in America, Asia and Europe will soon demand many more of these. The price of copper, Mr Friedland suggested, could jump ten-fold in response. Right now, however, the train is not so much derailed as chugging along happily. Having peaked at $10,700 a tonne in March last year, copper prices at the London Metal Exchange have dropped by around 10% since January, to $8,300 a tonne. Spot prices remain on par with or higher than those for delivery in three months, suggesting that investors do not expect them to bounce back soon. What is going on?Because of its range of uses, which include construction, electronics and weaponry, copper prices indicate the health of the global economy, earning the metal the nickname “Dr Copper”. Worries about the economy may therefore be making investors gloomy about copper’s prospects. The post-covid rebound in China, which consumes as much as 55% of global supply, is already fading. Growth is also flagging in the West as rising interest rates bite. Yet the lack-of-demand story does not fully explain the price fall. Despite the country’s construction slump, China is using 5% more copper this year than last, possibly because the metal—used to form cladding, pipes and roofs—tends to track building completions, which have held up, rather than housing starts. A 7% jump in the making of cooling units in anticipation of a hot summer also supports demand. If copper markets are decidedly cool, then, it is also because supply has risen. Over the winter a series of disruptions—from protests in Peru to floods in Indonesia—dented global production. Now these problems are easing. As a result, smelters are feeling confident enough to charge miners higher fees, indicating no shortage of raw materials (see chart 1).At the same time, financial investors are snubbing copper. As interest rates rise, they prefer to hold cash-generating assets rather than commodities, which yield nothing. For much of this year “non-commercial” net positioning on copper-futures markets has been in the red, implying that more investors are betting prices will fall than recover (see chart 2). Yet today’s prices remain $2,500 a tonne above production costs at the marginal mine, notes Robert Edwards of CRU, a consultancy. This implies that the recent correction has taken froth out of the market, rather than pushed prices too low, suggesting they could stay subdued for a while.As the energy transition speeds up, it should give a jolt to demand. Sales of electric vehicles (evs), which are already rising, are expected to ramp up significantly in the coming years, and each unit contains three to four times more copper than its petrol-powered peer. Even in a scenario where the transition happens slowly, the International Energy Agency (IEA), an official forecaster, estimates that copper demand from green uses, propelled by the ev boom and undersea cabling for wind farms, will nearly double by 2040. Supply may struggle to keep up. The average age of the world’s ten biggest mines is 64, which is forcing miners to dig deep for ores of ever lower quality, making each new tonne of refined copper costlier to produce. New mines are scarce. Assuming all certain and probable projects go ahead, McKinsey, a consultancy, forecasts that supply will hit 30m tonnes by 2031, 7m tonnes short of estimated demand. A severe crunch like that envisioned by Mr Friedland could still be avoided. Most forecasting models, including the IEA’s, expect copper demand outside clean-energy uses to remain stable. Tom Price and Ben Davis of Liberum Capital, an investment bank, reckon this is unlikely, because China’s long building boom has probably ended. Pricey copper will also prompt substitution: some evs already use aluminium wiring. And McKinsey points out that new tech—if it achieves its potential—could close much of the supply gap this decade. There is time to avoid a train wreck. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Over the past year we have examined the economic fortunes of Hikelandia. In this group of eight countries—Brazil, Chile, Hungary, New Zealand, Norway, Peru, Poland and South Korea—central banks have fought inflation with unparalleled aggression. Hikelandia started raising interest rates a whole year before America’s Federal Reserve, putting it well ahead of the curve. Since then its average policy rate has risen by more than seven percentage points, compared with around five for the Fed. Yet for months Hikelandia’s central bankers had little joy: inflation kept rising.Now, at long last, that is changing. Although Hikelandia’s “core” inflation, a measure that strips out volatile prices such as for food and energy, is still too high, at around 9% year on year, it is on the way down, in part because higher rates are starting to bite (see chart). Hikelandia’s experience offers a glimmer of hope for other inflation-fighting central banks.Wage inflation is moderating across the land. In Chile, for example, pay growth is down a little from the outrageously high 11% year-on-year rate reached in January. This, in turn, is helping cut measures of inflationary pressure. In October South Korea’s inflation rate in the labour-intensive service sector was 4.2% year on year; it has since fallen to 3.3%. Poland’s has slipped from 13.4% in December to 12.3%.Inflation expectations are also dropping, influenced by falling energy and food prices. The average Brazilian expects inflation of 4% over the next year, down from 6% for much of 2022. Kiwis reckon inflation in five years’ time will be around 1%, half their forecast in December.Norway is the only member of Hikelandia that seems to be making no progress. In May core prices unexpectedly rose by 6.7% year on year, a new high. A weaker krone is raising the cost of imports. Strong domestic demand is playing a role, too. In June the central bank surprised markets in an attempt to cool things down, raising the policy rate by 0.5 percentage points.Outside Oslo, the mood music in Hikelandia’s central banks has changed. Officials are still talking tough, of course. South Korea’s rate-setters insist that they will maintain hawkish policy for a “considerable time”. Brazil’s monetary-policy committee worries about “a larger or more persistent de-anchoring of long-term inflation expectations”. Yet this hides the fact that Hikelandia’s central banks have largely stopped raising rates. Chile’s bank believes inflationary risks “have been balancing out”. Hungary’s rate-setters expect that “disinflation will continue to accelerate”.Success has come at a cost, though. In 2021 the world economy and Hikelandia grew at the same speed. Now, global growth is 2.5% at an annualised rate, and Hikelandia is stagnating. The unemployment rate has risen by close to a percentage point from a recent low in Chile, and is inching up in Brazil and New Zealand. At least for a while, Hikelandia’s policymakers will probably see a slower economy as a price worth paying. Inflation will have to fall an awfully long way before we start calling these countries “Cutlandia”. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

For as long as inflation has been high economists have fought about where it came from and what must be done to bring it down. Since central bankers have raised interest rates and headline inflation is falling, this debate may seem increasingly academic. In fact, it is increasingly important. Inflation is falling mostly because energy prices are down, a trend that will not last for ever. Underlying or “core” inflation is more stubborn (see chart 1). History suggests that even a small amount of sticky underlying inflation is hard to dislodge. So the chiefs of the world’s most important central banks are now warning that their job is far from done. “Getting inflation back down to 2% has a long way to go,” said Jerome Powell, chairman of the Federal Reserve, on June 29th. “We cannot waver, and we cannot declare victory,” Christine Lagarde, president of the European Central Bank, told a meeting of central bankers in Portugal just two days earlier. Andrew Bailey, governor of the Bank of England, recently said that interest rates will probably stay higher than markets expect. This means there will be no let-up in the economists’ wars. The first front is partly ideological, and concerns who should shoulder the blame for rising prices. An unconventional but popular theory suggests greedy firms are at fault. This idea first emerged in America in mid-2021, when profit margins for non-financial companies were unusually strong and inflation was taking off. It is now gaining a second wind, propelled by the IMF, which recently found that rising profits “account for almost half the increase” in euro-zone inflation over the past two years. Ms Lagarde appears to be entertaining the thesis, too, telling the European Parliament that “certain sectors” had “taken advantage” of the economic turmoil, and that “it’s important that competition authorities could actually look at those behaviours.”Greedflation is a comforting idea for left-leaning types who think the blame for inflation is too often pinned on workers. Yet it would be strange to think firms suddenly became more greedy, making prices accelerate. Inflation is caused by demand exceeding supply—something that offers plentiful profit opportunities. The greedflation thesis “muddles inflation’s symptoms with its cause”, according to Neil Shearing of Capital Economics, a consultancy. Wages have tended to play catch-up with prices, not vice versa, because, as the IMF’s economists note, “wages are slower than prices to react to shocks”. That is a crucial lesson from today’s inflationary episode for those who always view economic stimulus as being pro-worker.The second front in the inflation wars concerns geography. America’s inflation was at first more homegrown than the euro zone’s. Uncle Sam spent 26% of GDP on fiscal stimulus during covid-19, compared with 8-15% in Europe’s big economies. And Europe faced a worse energy shock than America after Russia invaded Ukraine, both because of its dependence on Russian natural gas and the greater share of its income that goes on energy. A recent paper by Pierre-Olivier Gourinchas, chief economist at the IMF, and colleagues attributes just 6% of the euro zone’s underlying inflation surge to economic overheating, compared with 80% of America’s. This implies that Europe can get away with looser policy. The 3% of GDP of extra fiscal stimulus the euro zone has recently unleashed by subsidising energy bills, the authors find, has not contributed to overheating, and by reducing measured energy prices may even have stopped an inflationary mindset from taking hold. (The authors caution that things might have been different had energy prices not fallen, reducing the subsidy.) Interest rates are lower in Europe, too. Financial markets expect them to peak at around 4% in the euro zone, compared with 5.5% in America. Despite all this, inflation problems on each side of the Atlantic actually seem to be becoming more alike over time. In both places, inflation is increasingly driven by the price of local services, rather than food and energy (see chart 2). The pattern suggests that price rises in both places are being driven by strong domestic spending. Calculated on a comparable basis, core inflation is higher in the euro zone. So is wage growth. According to trackers produced by Goldman Sachs, a bank, wages are growing at an annualised pace of 4-4.5% in America, and nearly 5.5% in the euro area.Hence the importance of a final front: the labour market. Even if profit margins fall, central banks cannot hit their 2% inflation targets on a sustained basis without the demand for and supply of workers coming into better balance. Last year economists debated whether in America this required a higher unemployment rate. Chris Waller of the Fed said no: it was plausible job vacancies, which had been unusually high, could fall instead. Olivier Blanchard, Alex Domash and Lawrence Summers were more pessimistic. In past economic cycles, they pointed out, vacancies fell only as unemployment rose. Since then Mr Waller’s vision has in part materialised. Vacancies have fallen enough that, according to Goldman, the rebalancing of the labour market is three-quarters complete. Unemployment remains remarkably low, at 3.7%.Yet the process seems to have stalled of late (fresh data were due to be released as we published this article). Mr Blanchard and Ben Bernanke, a former Fed chairman, recently estimated that, given the most recent relationship between vacancies and joblessness, getting inflation to the Fed’s target would require the unemployment rate to exceed 4.3% for “a period of time”. Luca Gagliardone and Mark Gertler, two economists, reckon that unemployment might rise to 5.5% in 2024, resulting in inflation dropping to 3% in a year and then falling towards 2% “at a very slow pace”. Rises in unemployment of such a size are not enormous, but in the past have typically been associated with recessions. Meanwhile, in the euro zone, vacancies have not been particularly elevated relative to unemployment, making the route to a painless disinflation even more difficult to see. It is this front of the inflation wars which is most finely poised—and where the stakes are highest. ■ More

For as long as inflation has been high economists have fought about where it came from and what must be done to bring it down. Since central bankers have raised interest rates and headline inflation is falling, this debate may seem increasingly academic. In fact, it is increasingly important. Inflation is falling mostly because energy prices are down, a trend that will not last for ever. Underlying or “core” inflation is more stubborn (see chart 1). History suggests that even a small amount of sticky underlying inflation is hard to dislodge. So the chiefs of the world’s most important central banks are now warning that their job is far from done. “Getting inflation back down to 2% has a long way to go,” said Jerome Powell, chairman of the Federal Reserve, on June 29th. “We cannot waver, and we cannot declare victory,” Christine Lagarde, president of the European Central Bank, told a meeting of policymakers in Portugal just two days earlier. Andrew Bailey, governor of the Bank of England, recently said that interest rates will probably stay higher than markets expect. This means that there will be no let-up in the economists’ wars. The first front is partly ideological, and concerns who should shoulder the blame for rising prices. An unconventional but popular theory suggests greedy firms are at fault. This idea first emerged in America in mid-2021, when profit margins for non-financial companies were unusually strong and inflation was taking off. It is now gaining a second wind, propelled by the IMF, which recently found that rising profits “account for almost half the increase” in euro-zone inflation over the past two years. Ms Lagarde appears to be entertaining the thesis, too, telling the European Parliament that “certain sectors” had “taken advantage” of the economic turmoil, and that “it’s important that competition authorities could actually look at those behaviours.”Greedflation is a comforting idea for left-leaning types who feel that blame for inflation is too often pinned on workers. Yet it would be strange to think firms suddenly became greedier, making prices accelerate. Inflation is caused by demand exceeding supply—something that offers plentiful profit opportunities. The greedflation thesis thus “muddles inflation’s symptoms with its cause”, according to Neil Shearing of Capital Economics, a consultancy. Wages have tended to play catch-up with prices, not vice versa, because, as the IMF’s economists note, “wages are slower than prices to react to shocks”. That is a crucial lesson from today’s inflationary episode for those who always view economic stimulus as being pro-worker.The second front in the inflation wars concerns geography. America’s inflation was at first more home-grown than the euro zone’s. Uncle Sam spent 26% of GDP on fiscal stimulus during covid-19, compared with 8-15% in Europe’s big economies. And Europe faced a worse energy shock than America after Russia invaded Ukraine, both because of its dependence on Russian natural gas and the greater share of income that is spent on energy. A recent paper by Pierre-Olivier Gourinchas, chief economist at the IMF, and colleagues attributes just 6% of the euro zone’s underlying inflation surge to economic overheating, compared with 80% of America’s. This implies that Europe can get away with looser policy. The 3% of GDP of extra fiscal stimulus the euro zone has recently unleashed by subsidising energy bills, the authors find, has not contributed to overheating, and by reducing measured energy prices may even have stopped an inflationary mindset from taking hold. (The authors caution that things might have been different had energy prices not fallen, reducing the subsidy.) Interest rates are lower in Europe, too. Financial markets expect them to peak at around 4% in the euro zone, compared with 5.5% in America. Despite all this, inflation problems on each side of the Atlantic actually seem to be becoming more alike over time. In both places, inflation is increasingly driven by the price of local services, rather than food and energy (see chart 2). The pattern suggests that price rises in both places are being driven by strong domestic spending. Calculated on a comparable basis, core inflation is higher in the euro zone. So is wage growth. According to trackers produced by Goldman Sachs, a bank, wages are growing at an annualised pace of 4-4.5% in America, and nearly 5.5% in the euro area.Hence the importance of a final front: the labour market. Even if profit margins fall, central banks cannot hit their 2% inflation targets on a sustained basis without the demand for and supply of workers coming into better balance. Last year economists debated whether in America this required a higher unemployment rate. Chris Waller of the Fed said no: it was plausible job vacancies, which had been unusually high, could fall instead. Olivier Blanchard, Alex Domash and Lawrence Summers were more pessimistic. In past economic cycles, they pointed out, vacancies fell only as unemployment rose. Since then Mr Waller’s vision has in part materialised. Vacancies have fallen enough that, according to Goldman, the rebalancing of the labour market is three-quarters complete. Unemployment remains remarkably low, at 3.7%.Yet the process seems to have stalled of late (fresh data were due to be released as we published this article). Mr Blanchard and Ben Bernanke, a former Fed chairman, recently estimated that, given the most recent relationship between vacancies and joblessness, getting inflation to the Fed’s target would require the unemployment rate to exceed 4.3% for “a period of time”. Luca Gagliardone and Mark Gertler, two economists, reckon that unemployment might rise to 5.5% in 2024, resulting in inflation dropping to 3% in a year and then falling towards 2% “at a very slow pace”. Rises in unemployment of such a size are not enormous, but in the past have typically been associated with recessions. Meanwhile, in the euro zone, vacancies have not been particularly elevated relative to unemployment, making the route to a painless disinflation even more difficult to foresee. It is this front of the inflation wars which is most finely poised—and where the stakes are highest. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More