Economy

This article is an on-site version of our Disrupted Times newsletter. Sign up here to get the newsletter sent straight to your inbox three times a weekToday’s top storiesFor up-to-the-minute news updates, visit our live blogGood evening.The European Central Bank and Bank of England have refused to declare victory over inflation. Policymakers yesterday signalled that interest rates would need to remain higher for longer, diverging from the US Federal Reserve. The ECB and BoE announcements damped a market rally sparked by the Fed, which indicated it would cut rates next year.Christine Lagarde, ECB president, warned there was still “work to be done” to tame price pressures after leaving interest rates unchanged, as she pushed back against market expectations for the central bank to cut rates as early as March.“We should absolutely not lower our guard” against inflationary pressures, she said, even as the ECB cut its inflation forecasts for this year and 2024.Later in the day, the BoE voted by six to three to hold rates at 5.25 per cent, as the Monetary Policy Committee warned it was confronting a more stubborn problem with inflation than its counterparts across the Atlantic.The announcements came just hours after the Fed held interest rates at a 22-year high of 5.25 per cent to 5.5 per cent and provided forecasts showing US officials believe rates will end next year at 4.5 per cent to 4.75 per cent.US officials expect rates to fall even lower in 2025, with most forecasting they would end up between 3.5 per cent and 3.75 per cent.The Fed’s projections triggered a rally in US stocks and a sharp fall in Treasury yields. The benchmark S&P 500 gained 1.4 per cent to close Wednesday at its highest level since January 2022, while the two-year Treasury yield fell 0.3 percentage points to 4.43 per cent — its biggest daily decline since the collapse of Silicon Valley Bank in March. The benchmark 10-year Treasury yield also fell 0.17 percentage points on Wednesday and dropped further during Asia morning trading to sit below 4 per cent for the first time since August.But the more hawkish stance from the BoE and ECB sapped the life out of the rally. The region-wide Stoxx Europe 600 rose 0.9 per cent, led higher by big gains for rate-sensitive real estate stocks. London’s FTSE 100 added 1.3 per cent, while France’s Cac 40 rose 0.6 per cent, falling just short of an all-time closing high.Despite the divergence, investors bet that the ECB and BoE will follow the Fed in signalling cuts to borrowing costs in 2024. “Major central banks can deviate from the Fed in principle, but doing so in a significant way for an extended period historically has been difficult to do,” said Nathan Sheets, a former US Treasury official.Need to know: UK and European economyUK business activity rose at the fastest pace in six months in December, according to a closely watched survey. The results were ahead of expectations and eased fears that the UK economy would contract in the final quarter of this year.Eurozone business activity declined at a steeper rate than anticipated this month, according to the flash S&P Global composite purchasing managers’ index, dealing another blow to the region’s struggling economy. The index fell to a two-month low of 47, down from 47.6 a month earlier, after activity contracted in both the services and manufacturing sectors.The EU is set to extend its truce with the US over steel tariffs imposed by Donald Trump until after the 2024 presidential election. European trade commissioner Valdis Dombrovskis told the Financial Times he was in favour of postponing the reimposition of retaliatory tariffs on goods such as bourbon whiskey and Harley-Davidson motorbikes. Washington had also agreed to suspend its levy on steel and aluminium.The UK government has signalled it will not step in to help France’s EDF fund Britain’s flagship nuclear power project. The Hinkley Point C project is likely to exceed the revised £32.7bn estimate EDF put on it earlier this year after its Chinese partner CGN halted payments to cover mounting cost overruns. UK consumer confidence in December rose to its highest level since September and the second-highest since January 2022, according to research company GfK, suggesting households could be more inclined to spend this Christmas.Poland’s newly appointed Prime Minister Donald Tusk on Friday pledged to secure billions in funding that was frozen by Brussels during Warsaw’s previous administration over concerns about the rule of law in the country. Tusk added that €5bn of EU funding already released amounted to “a Christmas present” that would “improve our energy sovereignty”.Need to know: global economyIndustrial output in China rose 6.6 per cent year on year in November, while retail sales came in lower than expected, rising 10.1 per cent. The increases from a low base failed to dispel doubts about the growth prospects of the world’s second-biggest economy.The price of carbon fell to its lowest level in 14 months yesterday, briefly slumping as much as 4 per cent in London to below €66 per tonne of carbon emissions. Traders appear unconvinced that the agreement struck at the COP28 summit will lead to meaningful government action on the climate.Vladimir Putin’s war in Ukraine is putting “considerable strain” on Russia’s economy, driving up domestic consumer prices and forcing Moscow to spend a third of its budget on defence, the US Treasury department has said.Need to know: businessSt James’s Place is planning to raise up to £1bn by 2030 to buy the businesses of retiring partners, as it tackles challenges wrought by its increasing scale and higher interest rates.Munich prosecutors have charged Wirecard’s former chief financial officer, Burkhard Ley, with fraud, breach of trust, accounting and market manipulation more than three years after the payments company collapsed in one of Germany’s biggest corporate scandals.Apollo, Carlyle and KKR are studying separate bids for Pension Insurance Corporation ahead of a deadline this week, as big private capital groups look for a way into the thriving market for UK corporate pension deals.US social media giant Meta has been forced to apologise publicly to Qatari billionaire (and Janet Jackson’s former husband) Wissam al Mana and promise extra protection after his image was used in crypto scam advertisements on Facebook. Science round-upTeams of bacteria in the gut help fight disease by eating invading pathogens’ lunch, according to research that underscores the health benefits of fostering humans’ rich digestive ecology. A pill that has the potential to treat the most common and deadly cancers will begin human clinical trials next month, Belfast-based CV6 Therapeutics announced yesterday, in a milestone for Northern Ireland’s growing life sciences industry.Scientists have combined brain-like tissue with electronic hardware to create a speech-recognition and calculation system, advancing research into the creation of high-powered biological computers.Some good newsThe scimitar-horned oryx, a type of antelope that was declared extinct in the wild in 2000, was downlisted to endangered on Wednesday. The species is roaming Chad again after conservationists reintroduced it using captive animals.The scimitar-horned oryx is no longer extinct in the wild thanks to conservation work in Chad More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Investors are “too optimistic” that the European Central Bank will begin cutting interest rates in March, especially while eurozone wage growth keeps up pressure on prices, Belgium’s central bank governor has said. Pierre Wunsch, one of the more hawkish members of the ECB’s governing council, told the Financial Times he was not yet ready to rule out raising borrowing costs further if wages in the bloc kept rising rapidly, although he said “the probability of a hike has gone down quite a lot”.“We are moving in the right direction on inflation and I am much more optimistic than a few months ago, but we still need to see good news on wages,” said Wunsch in an interview, a day after the ECB left rates on hold and committed to keeping them “at sufficiently restrictive levels for as long as necessary”.Eurozone wage growth accelerated at its fastest pace for over a decade in the third quarter, when hourly labour costs rose 5.3 per cent from a year earlier, up from 4.6 per cent in the second quarter, according to figures published on Friday by Eurostat, the EU’s statistics arm.“It is going in the right direction for some indicators but wage increases are still too high and there are no clear signs that this is slowing down fast enough,” said Wunsch. “We need to see a slowdown.”Annual growth of median wages in eurozone job adverts slowed from above 5 per cent last year to below 4 per cent in the third quarter of this year, according to a tracker by job search website Indeed and the Central Bank of Ireland. But negotiated wages in the region rose 4.7 per cent in the third quarter, the biggest annual rise in the eight years since the ECB started tracking the data.There are signs of companies starting to absorb rising wage costs by compressing their profit margins rather than passing them on to customers via higher prices, he said. “We see that happening so it is not like we are dreaming this is going to happen.”Most ECB governing council members agreed this week on the need to wait until at least next summer to be confident inflation would keep falling rather than being kept elevated by spiralling labour costs as workers seek compensation for the surge in living costs over the past two years, according to several meeting participants.“We know a lot of negotiations will take place in the first quarter and the data will not be ready to interpret until the second quarter,” Wunsch said, adding that the chances of a rate cut in March seemed extremely slim. “There is a combination of shocks where we could continue to have much weaker inflation and a sharp downturn early next year that brings March into play for a rate cut, but that is highly unlikely and not our assumption,” he said.The ECB on Thursday held its deposit rate at 4 per cent, the highest level in its history, for the second meeting in a row. But after eurozone inflation fell to 2.4 per cent in November, the lowest level since July 2021, investors ramped up bets on how quickly the ECB would start cutting rates.Swaps markets were on Friday pricing in 1.55 percentage points of ECB rate cuts next year, with an 85 per cent chance of them starting in March. This week’s meetings of major central banks revealed a transatlantic divergence on the potential timing of rate cuts next year, with the US Federal Reserve revealing it had started discussing this possibility, while the ECB and the Bank of England pushed back on the idea more firmly.If the Fed started cutting rates before the ECB, “it doesn’t make it easier for us” even if it would not be “a binding constraint”, Wunsch said. “It has an impact, such as on market expectations. But we have to decide on the basis of what is happening in the eurozone.”ECB president Christine Lagarde said on Thursday “we should absolutely not lower our guard” against inflation. She added that about half of the workers covered under its wage tracker will have their collective bargaining agreements renegotiated in the first half of next year. “So it will be data-rich, particularly on the employment front,” she said.Wunsch said ECB rate-setters did not want to “over-emphasise” the “good news” from November’s bigger-than-expected drop in eurozone inflation.The ECB’s forecast for euro area inflation to drop from an average of 5.4 per cent this year to 1.9 per cent in 2026 was based on assumptions that borrowing costs would be higher than they are now, following the recent bond market rally. Looser financial conditions — bond yields fall as their prices rise — may also keep inflation higher by boosting economic activity and demand.“A lot of governors believe financial conditions are now not likely to be restrictive enough,” said Wunsch. “They are a lot looser than those we have in our projections. But that is partly offset by the fall in energy prices since the cut-off date for our projections and other elements.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.As far as interest rate decisions are concerned, central banks ended 2022 and 2023 on the same page. Last year, in their pre-Christmas meetings the US Federal Reserve, European Central Bank and Bank of England all raised rates by 50 basis points as they fought soaring inflation. This year, with price growth falling rapidly, they all kept their — now much higher — rates unchanged. But their accompanying festive messages this week hit very different notes. To misquote Leo Tolstoy: all central banks are happy that inflation is falling, but each is unhappy in its own way that it is not falling fast enough.After waiting too long to tighten policy initially, central banks rightly want to ensure high inflation is comprehensively beaten. The case to keep high rates on hold was indeed strong. In America, although inflation has fallen sharply to 3.1 per cent, its jobs market is still hot and consumer spending is resilient. In Britain, core inflation — which excludes energy and food — is still well above its long-term average at 5.7 per cent. As for the eurozone, while inflation is within half a percentage point of its target, wage growth looks sturdy and further salary settlements next year warrant vigilance. But with the impact of higher rates still feeding through to households and businesses, the probability of undershooting the 2 per cent target has risen everywhere. The risk, though, is not the same on both sides of the Atlantic. It is perhaps higher in the eurozone, where timelier measures suggest pay growth is already on its way down. On Friday, forward indicators of services and manufacturing activity also pointed to a deeper slowdown ahead. Economic resilience in America and elevated wage growth in Britain suggest core inflation is, however, likely to be stickier in those countries. With that in mind, the signalling from the Fed and the ECB, in particular, seemed off the mark.The Fed came across as dovish. Its new dot plot of interest-rate projections surprised by implying three 25bp rate cuts in 2024, up from just two. Its forward guidance also watered down the possibility of further increases. But chair Jay Powell also did little to push back on the notion that the Fed is now pivoting to cuts.With financial markets already on a festive high, after delivering dovish dot plots Powell should have dialled up the caution. Stock markets predictably rallied, with the S&P 500 nearing a two-year high. Bond yields also dropped. These moves amount to a notable loosening of financial conditions — which could be a problem for the Fed if inflation does indeed prove resilient.By contrast, the ECB president, Christine Lagarde, was hawkish, reiterating that officials “did not discuss rate cuts at all”. But lower inflation forecasts opened the door to a pivot, and reiterated the greater risks of undershooting in the eurozone. The Frankfurt-based bank seems too steadfast, and could now make the mistake of loosening rates too slowly. The BoE was perhaps most on point with its messaging, though unlike the other two, governor Andrew Bailey did not face a press conference this week. It came across as defiantly hawkish, with three out of nine committee members also voting for a 25bp rate rise. Higher UK consumer confidence and economic activity data on Friday backed up its tone. With market reactions and policy lags to factor in, pulling off a successful pivot in interest rates is not going to be easy anywhere. Differing economic circumstances, moreover, mean the US, EU and UK central banks will not always be on the same page. But, judging by their end-of-year showing, it is clear that none is totally sure how far or when they will need to make cuts. Here’s hoping they can start 2024 with a bit more clarity. More

Buying a home is a less attainable goal for many young people, and rents are expensive. Could that dog Democrats in the 2024 election?Cameron Ambrosy spent the first weekend of December going to 10 open houses — purely for research purposes. The 25-year-old in St. Paul, Minn., has a well-paying job and she and her husband are saving diligently, but she knows that it will be years before they can afford to buy.“It is much more of a long-term goal than for my parents or my grandparents, or even my peers who are slightly older,” said Ms. Ambrosy, adding that for many of her friends, homeownership is even farther away. “There’s a lot of nihilism around long-term goals like home buying.”As many people pay more for rent and some struggle to save for starter homes, political and economic analysts are warning that housing affordability may be adding to economic unhappiness — and is likely to be a more salient issue in the 2024 presidential election than in years past.Many Americans view the economy negatively even though unemployment is low and wage growth has been strong. Younger voters cite housing as a particular source of concern: Among respondents 18 to 34 in a recent Morning Consult survey, it placed second only to inflation overall.Wary of the issue and its political implications, President Biden has directed his economic aides to come up with new and expanded efforts for the federal government to help Americans who are struggling with the costs of buying or renting a home, aides say. The administration is using federal grants to prod local authorities to loosen zoning regulations, for instance, and is considering executive actions that focus on affordability. The White House has also dispatched top officials, including Lael Brainard, who leads the National Economic Council, to give speeches about the administration’s efforts to help people afford homes.“The president is very focused on the affordability of housing because it is the single most important monthly expense for so many families,” Ms. Brainard said in an interview.Housing is “the single most important monthly expense for so many families,” noted Lael Brainard, director of the National Economic Council. Erin Schaff/The New York TimesHousing has not traditionally been a big factor motivating voters, in part because key market drivers like zoning policies tend to be local. But some political strategists and economists say the rapid run-up in prices since the pandemic could change that.Rents have climbed about 22 percent since late 2019, and a key index of home prices is up by an even heftier 46 percent. Mortgages now hover around 7 percent as the Federal Reserve has raised rates to the highest level in 22 years in a bid to contain inflation. Those factors have combined to make both monthly rent and the dream of first-time homeownership increasingly unattainable for many young families.“This is the singular economic issue of our time, and they need to figure out how to talk about that with voters in a way that resonates,” said Tara Raghuveer, director of KC Tenants, a tenant union in Kansas City, Mo., referring to the White House. The housing affordability crush comes at a time when many consumers are facing higher prices in general. A bout of rapid inflation that started in 2021 has left households paying more for everyday necessities like milk, bread, gas and many services. Even though costs are no longer increasing so quickly, those higher prices continue to weigh on consumer sentiment, eroding Mr. Biden’s approval ratings.While incomes have recently kept up with price increases, that inflationary period has left many young households devoting a bigger chunk of their budgets to rental costs. That is making it more difficult for many to save toward now-heftier down payments. The situation has spurred a bout of viral social media content about the difficulty of buying a home, which has long been a steppingstone into the middle class and a key component of wealth-building in the United States.That’s why some analysts think that housing concerns could morph into an important political issue, particularly for hard-hit demographics like younger people. While about two-thirds of American adults overall are homeowners, that share drops to less than 40 percent for those under 35.“The housing market has been incredibly volatile over the last four years in a way that has made it very salient,” said Igor Popov, the chief economist at Apartment List. “I think housing is going to be a big topic in the 2024 election.”Yet there are reasons that presidential candidates have rarely emphasized housing as an election issue: It is both a long-term problem and a tough one for the White House to tackle on its own.“Housing is sort of the problem child in economic policy,” said Jim Parrott, a nonresident fellow at the Urban Institute and former Obama administration economic and housing adviser. America has a housing supply shortfall that has been years in the making. Builders pulled back on construction after the 2007 housing market meltdown, and years of insufficient building have left too few properties on the market to meet recent strong demand. The shortage has recently been exacerbated as higher interest rates deter home-owning families who locked in low mortgage rates from moving.Some analysts think concerns about housing affordability could morph into an important political issue, particularly for hard-hit demographics like younger people.Mikayla Whitmore for The New York TimesConditions could ease slightly in 2024. The Federal Reserve is expected to begin cutting borrowing costs next year as inflation eases, which could help to make mortgages slightly cheaper. A new supply of apartments are expected to be finished, which could keep a lid on rents.And even voters who feel bad about housing might still support Democrats for other reasons. Ms. Ambrosy, the would-be buyer in St. Paul, said that she had voted for President Biden in 2020 and she planned to vote for the Democratic nominee in this election purely on the basis of social issues, for instance.But housing affordability is enough of a pain point for young voters and renters — who tend to lean heavily Democrat — that it has left the Biden administration scrambling to emphasize possible solutions.After including emergency rental assistance in his 2021 economic stimulus bill, Mr. Biden has devoted less attention to housing than to other inflation-related issues, like reducing the cost of prescription drugs. His most aggressive housing proposals, like an expansion of federal housing vouchers, were dropped from last year’s Inflation Reduction Act.Still, his administration has pushed several efforts to liberalize local housing laws and expand affordable housing. It released a “Housing Supply Action” plan that aims to step up the pace of development by using federal grants and other funds to encourage state and local governments to liberalize their zoning and land use rules to make housing faster and easier to build. The plan also gives governments more leeway to use transportation and infrastructure funds to more directly produce housing (such as with a new program that supports the conversion of offices to apartments).The administration has also floated a number of ideas to help renters, such as a blueprint for future renters’ legislation and a new Federal Trade Commission proposal to prohibit “junk fees” for things like roommates, applications and utilities that hide the true cost of rent.Some affordable housing advocates say the administration could do more. One possibility they have raised in the past would be to have Fannie Mae and Freddie Mac, which help create a more robust market for mortgages by buying them from financial institutions, invest directly in moderately priced rental housing developments. Ms. Raghuveer, the tenant organizer, has argued that the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, could unilaterally impose a cap on annual rent increases for landlords whose mortgages are backed by the agencies.But several experts said that White House efforts would only help on the margins. “Without Congress, the administration is really limited in what they can do to reduce supply barriers,” said Emily Hamilton, an economist at the Mercatus Center who studies housing.Republicans control the House and have opposed nearly all of Mr. Biden’s plans to increase government spending, including for housing. But aides say Mr. Biden will press the case and seek new executive actions to help with housing costs.While it could be valuable to start talking about solutions, “nothing is going to solve the problem in one year,” said Mark Zandi, chief economist of Moody’s Analytics and a frequent adviser to Democrats.“This problem has been developing for 15 years, since the financial crisis, and it’s going to take another 15 years to get out of it.” More

As inflation slows, prices for some physical goods are falling outright, which could lift consumers’ spirits.American shoppers, burned by more than two years of rapid inflation, are getting some welcome relief this holiday season: Prices on many products are falling.Toys are almost 3 percent cheaper this Christmas than last, government data shows. Sports equipment is down nearly 2 percent. Bigger-ticket items are also showing price declines: Washing machines cost 12 percent less than a year ago, for example. And eggs, whose meteoric rise in prices last winter became a prime example of the country’s inflation problem, are down 22 percent over the past year.Consumer prices, in the aggregate, are still rising, though not nearly as quickly as a year ago. Most groceries still cost more than they did a year ago. So do most services, such as restaurant meals, haircuts and trips to the dentist. And housing costs, the biggest monthly expense for most Americans, are still rising for both renters and home buyers. Overall, the price of physical goods is flat over the past year, while the price of services is up a bit more than 5 percent.Still, economists view the moderation in goods prices as an important step toward putting the high inflation of the past two and a half years more firmly in the rearview mirror. They expect it to continue: Most forecasters say prices for physical products will keep falling next year, especially prices for longer-lasting manufactured goods, where the recent declines have been largest. That should help price increases overall to ease.“We’re just kind of in the beginning of that phase, and we should continue to see downward pressure on prices in this category,” said Michelle Meyer, chief economist for Mastercard.For consumers, who have been dour about the economy despite low unemployment, falling prices on many goods could provide a psychological lift. After the rapid inflation of the past few years, a mere slowdown in price increases might not feel like much to celebrate. But seeing prices fall could be a different story — especially because some of the biggest recent declines have been in categories that consumers tend to pay the most attention to, such as gasoline. (The price of regular gas, which topped $5 a gallon nationally in June 2022, has fallen to just over $3 on average, according to AAA.)Most groceries still cost more than they did a year ago. Maansi Srivastava/The New York Times“People will key in on certain prices,” said Neale Mahoney, a Stanford University economist who recently left a role in the Biden administration. “We know that people will overweight certain things.”The price of many goods soared in 2021, fed by a surge in demand from consumers flush with pandemic relief checks and by supply chain disruptions that limited supplies of many products, especially those from overseas.Many economists initially expected a quick reversal, but instead prices kept rising. Supply chains took longer to return to normal than expected, and Russia’s invasion of Ukraine led to a spike in energy prices in 2022. At the same time, consumer demand for goods remained high, and many companies took advantage of the opportunity to push through price increases and pad their profit margins.Now, however, many of those forces are beginning to fade. Supply chains have largely returned to normal. Oil prices have fallen. Economic weakness in China and other countries has held down demand for many raw materials, which feeds through to consumer prices.Softer demand from American consumers could also be playing a role. The Federal Reserve has raised interest rates repeatedly since early last year in an effort to curb spending and control inflation. Consumers have so far proved remarkably resilient, but retailers in recent months have reported that shoppers have increasingly traded down to cheaper items or waited for sales before buying — trends that could accelerate if the economy cools further next year.“We think that the consumer is going to be looking for value, and that’s because they are very sensitive to price,” Carlos E. Alberini, chief executive of Guess, the fashion retailer, told investors last month. The company has “revisited some of the pricing structure we have in all brands,” he added.The price of services is up a bit more than 5 percent for such things as restaurant meals, haircuts and trips to the dentist.Hiroko Masuike/The New York TimesSome toy manufacturers and retailers that sell toys have also said they expect sales this season to be less robust than in years past and have leaned into advertising their products’ affordability.At many companies, price cuts have taken the form of Black Friday sales and holiday promotions that are larger for some categories of items than in past years. At Signet Jewelers, the big diamond retailer, sales fell in the third quarter, and the company recently said that it expected sales to be lower this holiday season than last year in part because of “elevated promotional activity.”“It’s been a different holiday season,” Virginia C. Drosos, Signet’s chief executive, told investors on a conference call this month. Instead of shopping early, customers are waiting to make their purchases and are looking for deals, she said.Matt Pavich, senior director of innovation and strategy for Revionics, a company that uses artificial intelligence to help retailers set prices, said companies were trying to cut prices before their competitors do.“As prices come down, there’s going to be the race to bring prices down more, get the credit for that,” he said. “We’re going to see retailers really trying to win back consumers’ trust.”Still, prices for most products remain well above where they were before the pandemic. A dozen eggs cost about 50 cents more than in February 2020. Used car prices, another prominent example of pandemic sticker shock, have fallen more than 10 percent from their peak early last year but are 37 percent above where they were in February 2020.Services prices are still climbing more quickly than before the pandemic. Some economists say that goods prices will need to fall further for overall inflation to return to the Federal Reserve’s target of 2 percent a year.“We need pretty substantial deflation, and I wouldn’t call what we’re seeing ‘substantial,’” said Wendy Edelberg, director of the Hamilton Project, an economic policy division of the Brookings Institution. “It’s not even substantial in a historical context.”Indeed, prices of durable goods fell much of the two decades that preceded the pandemic. Long-term trends such as globalization and automation have tended to push down manufacturing costs. Intense competition among retailers, especially with the rise of online shopping, meant those savings were mostly passed on to consumers.Services prices, on the other hand, rarely fall, in part because wages account for a much larger share of the cost of most services. During the decade before the pandemic, services prices gradually rose while goods prices were flat or fell, resulting in an extended period of stable, moderate inflation.Economists don’t expect to see outright deflation, in which prices fall for both goods and services. That’s a good thing: Overall price declines are generally viewed as economically dangerous, if they last.“When demand in the economy is weak, the last thing you want is someone to say, ‘I’m not going to buy that car today because it’s going to be $600 less expensive in six months,’” said Karen Dynan, an economist at Harvard.Brittany Greeson for The New York TimesThere are a few reasons. For starters, in theory, deflation could prompt consumers to hold off on spending, touching off a downward spiral. People may be unlikely to buy today what they expect to be cheaper tomorrow. Once deflation takes hold, it can be difficult to escape: Japan has been stuck in a deflationary pattern since the late 1990s.“When demand in the economy is weak, the last thing you want is someone to say, ‘I’m not going to buy that car today because it’s going to be $600 less expensive in six months,’” said Karen Dynan, an economist at Harvard.For another, companies are unlikely to raise wages in a world where they cannot charge more. And if wages are not going up — or are even going down — it will be harder for households to keep up with fixed bills, like mortgage interest payments.But while broad-based price declines are a problem, most economists view the more limited declines happening now as a sign that the economy is gradually moving past the disruptions of the pandemic.“Supply chains have basically normalized,” said Neil Dutta, head of economic research at Renaissance Macro. “Household demand behavior has basically normalized, the dollar is still pretty strong. I wouldn’t see a reason why goods prices would go higher.” More

By Stella Qiu and Alun JohnSYDNEY/LONDON (Reuters) -Shares and bonds on Friday globally continued to bask in the glow of Wednesday’s Fed meeting, with MSCI’s world share index set for a seventh straight winning week, its longest run in six years, and the benchmark 10-year Treasury yield trading below 4%.Europe’s broad STOXX 600 benchmark traded at a 23-month high, up 0.2% on the day and S&P 50 futures rose 0.25% after the benchmark had reached its highest since January 2022 on Wednesday around 2% off an all-time high. [.N] MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.1% and touched its highest since August, lagging global benchmarks because of weakness in China. Wednesday’s Federal Reserve meeting continued to underpin stock and bond bulls. At that meeting, the Fed left interest rates unchanged, as expected, but policy makers pencilled in 75 basis points of rate cuts for 2024, and Chair Jerome Powell said the historic tightening of monetary policy was likely over, as inflation falls faster than expected. Markets have taken that and run with it, pricing in around 150 basis points of Fed cuts next year, along with a similar amount from the European Central Bank, and 110 for the Bank of England, despite rate setters at both European central banks trying to push back against rate cuts at their Thursday meetings. “It was an interesting 24 hours to say the least. The Fed, obviously was more dovish than was expected and the market has been rallying strongly on the back of that and Powell’s comments which endorsed rate cuts for the first time,” said Sebastian Vismara, senior financial economist at BNY Mellon (NYSE:BK) Investment Management. “The largest driver for the equity markets other than global growth expectations are U.S. real rates and the fact that the Fed came out so dovish is really meaningful. Global markets care a lot more about what the Fed does than the BoE or ECB.” MSCI’s world share index was up 0.1% on the day, around its highest since April 2022 and set for a weekly gain of 2.7% its best week since the start of November, and on track for its seventh week of gains in succession. ECB President Christine Lagarde said on Thursday that policymakers “did not discuss rate cuts at all”, but Friday PMI activity data showed difficulties in the euro zone economy: preliminary Composite PMI, fell to 47.0, worse than expected, and marking its seventh month below the 50 level separating growth from contraction.Euro zone bonds rallied on the data, which challenges the ECB’s higher for longer mantra. Germany’s 10-year bond yield was down 10 basis points at 2.03% its lowest since March. [GVD/EUR] The U.S. 10-year yield was down 3 bps at 3.896%, heading for a 35 basis point weekly fall, its most since pandemic volatility in March 2020. [US/] A raft of data from China was also in focus, and showed factory and retail sectors sped up in November, but some indicators missed expectations, suggesting the recovery is not solid yet. Chinese bluechips gave up earlier gains to be 0.3% lower and hit a five-year trough. Hong Kong’s Hang Seng index, however, rebounded 2.2%, driven by a more than 3% jump in Chinese real estate firms on news that Beijing and Shanghai have relaxed home purchase restrictions. [.SS] In currency markets, the euro dipped 0.28% to $1.0961, hurt by the weak PMI data, but held onto the bulk of its 1.1% gain from Thursday after the ECB seemed more hawkish than the Fed. [FRX/] The Fed’s dovishness and the fall in U.S. yields has weighed on the dollar index, which tracks the greenback against six peers, and which is down 1.8% this week. Oil prices rose on Friday, on track to notch their first weekly rise in two months after benefiting from a bullish forecast from the International Energy Agency (IEA) on oil demand for next year and a weaker dollar.U.S. crude rose 0.82% to $72.16 per barrel, while Brent was up 0.67% to $77.12 per barrel. [O/R]Spot gold was up 0.3% at $2,043.1 an ounce. [GOL/] More

BERLIN (Reuters) -Germany approved on Friday the 2023 supplementary budget, with the suspension of a self-imposed cap on borrowing after a constitutional court ruling last month tore up the government’s spending plans.The budget was approved with 392 votes in favour and 274 against in parliament’s lower house. After that, the upper house also passed the law on the supplementary budget with no objections.The decision on the debt brake suspension required an absolute majority in the Bundestag, with more than half of the members voting in favour. There were 414 votes in favour, 242 against it, and nine abstentions.The government justified the suspension of the constitutionally enshrined debt brake, which limits net debt borrowing to 0.35% of GDP, by saying the war in Ukraine constituted an emergency situation. In the past few weeks, the government has scrambled to find a way to accommodate the court ruling that blocked the transfer of unused funds from the pandemic to green investment, blowing a 60-billion-euro ($65.76-billion) hole in its finances.With its the supplementary budget, the federal government exceeds the borrowing permitted under the debt brake by 44.8 billion euros ($49 billion), with planned new borrowing of 70.6 billion euros. Of this figure, 43.2 billion euros is earmarked for energy price subsidies for gas, district heating and electricity. About 1.6 billion euros will go to a relief fund created for floods in the Ahr valley in 2021. THE 2024 BUDGET One week after the court ruling, the government agreed on this year’s supplementary budget, but it took almost a month to clinch a last-minute deal on its 2024 budget.Wednesday’s agreement will reinstate Germany’s self-imposed limits on new debt despite warnings this could hamper growth in Europe’s top economy and slow its green transition.After the court ruling, Chancellor Olaf Scholz’s three-party coalition needed to either suspend the debt brake for the fifth consecutive year or find some 17 billion euros in savings and tax hikes.Just two days after the 2024 budget deal, the government has already passed in both houses of parliament some resolutions that will take effect next year. One such measure German lawmakers approved on Friday is a higher carbon dioxide surcharge that will increase fuel and heating costs, as part of the revised 2024 budget.The surcharge increase, part of a range of measures agreed to plug the budget hole, was passed with the majority of the three coalition parties.The CO2 price will rise to 45 euros a metric ton on Jan. 1 from 30 euros now. That is likely to boost the price of petrol by about 4.5 cents a litre.The Bundestag also approved a cut in the electricity tax for industry, which will fall to the European minimum rate of 50 cents per megawatt hour in 2024 and 2025, translating into an expected annual relief of around 3.25 billion euros. Lawmakers also approved limiting parental allowance to couples with a taxable income of up to 175,000 euros. For single parents, the limit is 150,000 euros. ($1=0.9124 euros) More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.British households have built up record debts of £3bn with electricity and gas suppliers, according to figures released on Friday, highlighting the impact of the ongoing cost of living crisis with energy bills still relatively high. Industry regulator Ofgem said constrained household budgets had pushed the total amount owed to energy suppliers up by £400mn since mid-October.As a result, Ofgem announced the launch of a consultation to help suppliers offset their higher debt costs by adding an extra charge to all household bills.The proposals would add about £16 to the typical annual household bill from April, through adjustment to the price cap that limits the amount a supplier can charge per unit of energy. Ofgem said the move was necessary to ensure suppliers were “resilient” and able to help customers who needed support. “We know that cost of living pressure is hitting people hard and this is evident in the increase in energy debt reaching record levels,” said Tim Jarvis, director-general for markets at Ofgem. “However . . . we must take action to make sure suppliers can recover their reasonable costs, so the market remains resilient, and suppliers are offering consumers support in managing their debts.”The cost of electricity and gas has fallen since last winter when record wholesale energy prices triggered by Russia’s full-scale invasion of Ukraine pushed the price cap as high as £4,059, prompting the government to step in to support households. But the ending of those subsidies has left many households still struggling to pay their energy bills. Although wholesale gas and electricity prices have fallen they remain above pre-crisis levels. This is reflected in the energy price cap, which had dropped to £1,834 but is still much higher than pre-energy crisis levels when it was usually below £1,100.The proposed surcharge is designed to avoid a repeat of the market rout in late 2021 and early 2022 when 30 suppliers collapsed as wholesale energy prices surged and the price cap prevented them from passing on the extra costs to consumers.At the time, Ofgem allowed the remaining suppliers to recoup the cost of bailing out the millions of customers of those failed companies by adding £82 to each household bill.Gillian Cooper, director of energy at consumer group Citizens Advice, urged the government to do more to support struggling households. “Without action we’ll remain stuck in a cycle where rising levels of energy debt slowly pushes up the price cap and leads to higher bills for all,” she said. More