Economy

Rishi Sunak was quick to claim credit for the lowest annual UK inflation rate in two years on Wednesday, saying that taming price rises had required “hard decisions and fiscal discipline” and would ease pressures on families. But even as the prime minister declared that he had met his pledge to voters to halve price growth by the end of 2023 — a landmark widely predicted by analysts and the Bank of England — his government was confronting an uncomfortable reality that will hang over its Autumn Statement next week. Although inflation has eased sharply since the start of the year, it is still well over twice the BoE’s 2 per cent target. The price level measured by the consumer prices index is still up by one-fifth since the eve of the inflationary upsurge in early 2021, highlighting a fierce squeeze on household incomes. Tomasz Wieladek, chief European economist at investment company T Rowe Price, said consumers would “continue to feel the effect of higher prices on their disposable incomes for some time to come”.Data from the Office for National Statistics showed a steeper than expected drop in the headline inflation rate to 4.6 per cent in October, driven in part by a reduction in energy regulator Ofgem’s price cap. The core CPI rate, which excludes energy and food, rose 5.7 per cent in the 12 months to October, down from 6.1 per cent in September. Crucially, the rate of services inflation, which is closely watched by BoE interest rate-setters as a gauge of domestic price pressures, slowed more than expected from 6.9 per cent to 6.6 per cent. “Some genuine progress is being made”, said Philip Shaw, an economist at Investec. Sunak is hoping for a brighter economic picture ahead of the general election expected next year. But analysts stressed that the better figures would by no means translate into a feelgood factor for households, in view of the continuing legacy of the worst inflationary surge for a generation. Consumer prices are still 21 per cent higher than in January 2021, before factors including supply chain disruption and Russia’s invasion of Ukraine caused them to soar. This means people can buy less with the same money, while interest rates of 5.25 per cent heap pressure on already-squeezed household finances. Despite robust wage growth, the real value of workers’ pay has fallen for most of the past two years. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.For consumers, what matters is the cumulative effect of more than two years of high inflation. On the ONS measure of earnings growth, which reports faster wage growth than most others, earnings adjusted for inflation are still below their levels in January 2021. Pay growth has outpaced inflation in recent months, but “it will take time for households to recover the purchasing power eroded over the past year”, said Yael Selfin, chief UK economist at advisory firm KPMG.Last month, headline inflation was driven lower by a decline in energy prices, which have steadily fallen since they jumped in October last year. The inflation rate in electricity, gas and other fuels dropped to minus 21.6 per cent last month from a peak of nearly 90 per cent in the same month last year. Nevertheless, prices were still 82 per cent above January 2021 levels. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Food prices display a similar trend. In October, UK food inflation dropped to 10.1 per cent, the slowest since June 2022, but prices last month were still 30 per cent higher than in January 2021.  Since poorer households spend a greater proportion of their income on essentials, the need for higher spending on energy and food can hit them hard. High prices are hard to avoid because neither category is easy to substitute. Detailed grocery data published by the ONS alongside its main inflation report showed the prices of sugar, baked beans, canned tomatoes and cooking sauces were all at least 50 per cent higher than in January 2021. Frozen beef burgers, cheese and milk all cost at least one-third more than in early 2021. One litre of olive oil cost £3.50 two years ago; last month it was £7.16. Some goods, such as computers and TVs, are on average cheaper now than in 2021. The cost of toys, medical services and some financial services have largely stagnated over the past two years.But at the same time, consumers have been hit by rising prices in many other areas, including insurance, clothing, flight tickets and accommodation. Relative to January 2021, these were up 41 per cent, 25 per cent, 78 per cent and 33 per cent respectively last month. Shadow chancellor Rachel Reeves pointed to the continuing squeeze, saying “higher mortgage bills, prices still rising in the shops and inflation twice as high as the BoE’s target” meant Britons were still worse off. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.A key question for households is how soon decelerating inflation will permit the central bank to begin reversing its rate rises, which have left borrowing costs at their highest since the 2008-09 financial crisis. The slowdown in inflation last month was sharper than analysts and the BoE expected, prompting financial markets to reassess expectations for rates. Before the ONS release, markets had priced a smaller reduction to 4.75 per cent by the end of next year. They are now predicting that the first rate cut could occur as early as June 2024, and that rates could fall to 4.5 per cent by December 2024. The reassessment will ease fixed mortgage rates and bring some relief to homebuyers and mortgage holders struggling with high payments. Nevertheless, UK inflation is still higher than the 2.9 per cent rate in the eurozone and 3.2 per cent in the US, and the BoE has signalled that it will start reducing borrowing costs only after it has seen definitive evidence of a cooling labour market and price pressures.Chris Hare, economist at HSBC, said that while the fall in inflation in October was “welcome”, it did not mean the broader mission to bring down price rises was over. “The road to 2 per cent could be a long and challenging one,” he said. Additional reporting by Ella Hollowood in London More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Food price inflation is set to fall sharply after large price rises for consumers in recent years, according to a major lender to agribusinesses, as production of agricultural commodities ramps up and demand is damped by weak economic growth.Rabobank, a specialist food and agribusiness bank, said in its annual outlook for 2024 that overall food price inflation will be dragged down by falling prices of key food staples such as sugar, coffee, corn and soyabeans as growers increase production in response to high prices. Demand, meanwhile, is set to decline as consumers struggle with the effects of high interest rates and inflation. The drop in the cost of some commodities will potentially boost profits for the dairy, bakery and meat sectors, the Netherlands-based bank said on Wednesday. “For the most part, we expect to see lower agricultural commodity prices, which alleviate the food inflation facing consumers,” Carlos Mera, head of agricultural commodities at Rabobank, told the Financial Times.Food prices, which are heavily influenced by the prices of the underlying agricultural commodities, rose in 2020 in the wake of Covid-19 lockdowns and soared last year as markets reacted to Russia’s full-scale invasion of Ukraine — one of the world’s largest exporters of grain and oilseeds. The number of people facing hunger surged to more than 735mn by 2022, up by 20 per cent compared with 2019, according to the UN, with Africa the worst affected region. Across the globe the cost of essentials, such as milk and eggs, shot up, prompting governments to impose price controls. Food price inflation has since started to come down in most rich countries but remains sticky in many parts of the world. Agricultural commodity markets over the past three years have been “mayhem”, said Mera. With Covid-19, adverse weather and the war in Ukraine, “how much more disruptive can it get?” he added.However, Rabobank expects that prices of wheat — a staple for billions, especially in developing countries — could be volatile as the world enters a fifth year of deficit in global supplies of the grain, it warned. The bank’s predictions mark something of a reversal of the price trends seen this year. Wheat prices fell on the back of a bumper Russian crop, while the cost of soft agricultural commodities, such as sugar and coffee, hit multiyear highs as the El Niño weather phenomenon brought extreme heat to Asian producers, hampering yields. Rabobank predicts that next year prices of key crops such as sugar will fall as weather conditions in Asia ease. Prices of sugar, which reached a 12-year high in September, could drop below the level predicted by the current forward curve, the bank said, as temperatures and rainfall in Thailand, the world’s third-largest producer, return to normal levels. Increased rainfall as a result of El Niño in some parts of South America is set to boost yields of coffee and soyabean crops. Rabobank forecasts that Brazil will see another bumper soyabean crop next year, while Argentina, the world’s largest exporter of soy byproducts such as soya oil, will recover after a failed harvest this year. Grain and oilseed exports from Argentina will hinge on what happens at the presidential run-off election this Sunday, said Mera. If the opposition party, which vows to liberalise trade, wins, then Argentine farmers may hold back stocks in anticipation of a more favourable exchange rate.Of all the staple agricultural commodities, wheat faces the most uncertainty heading in 2024. Dry weather in wheat-growing regions of Argentina and Australia could hinder crop yields, while the war in Ukraine continues to slash grain exports from the country, according to Rabobank.This will leave the world more dependent on Russia’s harvest — and at the whims of the Kremlin, which could opt to sell only to “friendly” countries or impose other export restrictions, said Mera. “We may see surprises [from Russia] in 2024.” More

Sri Lanka’s government, led by Ranil Wickremesinghe, faced public protests after implementing austerity measures linked to a US$3 billion bailout agreement with the International Monetary Fund (IMF) from March 2023. The stringent conditions, including spending cuts and tax reforms, are part of efforts to combat the nation’s escalating inflation, debt crisis, and recent sovereign default. These measures have notably hindered wage recovery in the aftermath of a significant financial downturn.The impact of the austerity measures has been uneven across Sri Lankan society. Reports indicate that these measures have disproportionately affected ethnic minorities and the country’s poorest citizens, who typically support the opposition. This demographic has been burdened with increased taxes such as a doubled value-added tax rate now at 15%, and taxes on pension-fund returns. Meanwhile, the Buddhist Sinhalese elite, who often back the current government, were spared from wealth taxes.This situation in Sri Lanka reflects findings from the study “IMF Lending: Partisanship, Punishment and Protest,” which suggests a global pattern where governments might use IMF programs to their political advantage. The study highlights that administrations may impose adjustment burdens on groups that are not their traditional supporters while protecting their own political base from financial hardships.Further research into IMF programs underscores that restructuring efforts can create distinct winners and losers within sectors of an economy. For instance, a survey covering civil servants from nine African countries found that only 30% perceived IMF reforms as beneficial.Citizens’ reactions to these policies have been marked by protests. While IMF programs are known to restrict economic policy autonomy, borrowing countries maintain considerable leeway in how loan conditions are applied. This discretion can lead to politicization and subsequent public demonstrations when citizens feel that reforms are implemented unfairly or target specific demographic groups.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

Despite a record cycle of monetary tightening, with deposit rates anticipated to peak at 4% into 2024, markets are predicting potential rate cuts as early as April. Inflation in the euro-area remains stubbornly high at 2.9%, still above the ECB’s target of 2%. As government financial support begins to wane and wages increase, there are growing concerns about maintaining price stability.Luis de Guindos, Vice President of the ECB, forecasted a temporary spike in inflation, while Centeno warned of a slower pace in achieving the inflation target. He also emphasized the need for reducing the ECB’s balance sheet but ruled out any immediate second-round effects that could further exacerbate inflationary pressures. Additionally, Centeno dismissed any acceleration in the asset purchase program as a response to the current economic challenges.The euro-area’s economic health is under close scrutiny as policymakers navigate between curbing high inflation and fostering growth amidst fears of a downturn. The ECB’s next moves will be closely watched by investors and analysts alike as they assess the impact of monetary policy on the region’s fragile economy.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

LONDON (Reuters) -Israel’s war with Hamas in Gaza will lead to a larger-than- expected budget deficit next year, investment bank JPMorgan said on Wednesday, adding that the cost of the conflict would also result in a significant jump in debt issuance.The bank’s analysts said they now expected the government’s budget deficit to widen to around 4.5% of gross domestic product (GDP) in 2023 and 2024 versus their previous forecasts of a 4.5% deficit in 2023 but a lower 2.9% deficit in 2024.They added that while the pressures would impact investor appetite for Israel’s bonds, they did not expect demand to evaporate. The bar for the country’s central bank to intervene in the bond market was also high, they said. “By now it is already clear that the war’s impact on the economy and government finances has been substantial,” a report by a group of JPMorgan analysts said.Their deficit forecasts assumed the conflict lasts “through early 2024” although the risks were skewed they said to the budget gap being even wider. The government’s debt-to-GDP ratio could already reach about 63% of GDP by end-2024 compared to 57.4% before the war. In a scenario where the conflict lasts “through mid-2024” and a proposed $14 billion U.S. military aid package falls however, it would be higher as the deficit could reach “high single digits”. More

BERLIN (Reuters) -The German government faces a 60 billion euro ($65 billion) hole in its finances after the country’s constitutional court ruled on Wednesday that a plan to spend unused emergency funds from the pandemic on climate initiatives was unconstitutional. The decision will complicate budget negotiations taking place this week within Chancellor Olaf Scholz’s three-way ruling coalition, whose popularity has slumped as Europe’s biggest economy teeters close to another recession.Wednesday’s decision by the constitutional court could also set a precedent for fiscal responses to future crises. Finance Minister Christian Lindner will meanwhile face increased scrutiny on how he plans to keep spending in check, just days before he is due meet his French counterpart for talks on enforcing fiscal discipline across European Union countries.Germany has hitherto burnished its reputation as the defender of sustainable financing in negotiations to reform EU fiscal rules in a pan-European deal by the end of the year. Lindner has previously said he had a “plan B” to deal with a negative ruling but has not divulged its contents. The ruling may force the government to make spending cuts given that Lindner has ruled out tax rises or suspending Germany’s constitutionally enshrined debt brake again. Lindner, Scholz and Economy Minister Robert Habeck were due to give a press conference at 1145 GMT. The government had earmarked the 60 billion euros for initiatives such as making buildings more energy efficient, subsidising renewable electricity and chips production, as well as supporting energy-intensive companies. “FAR-REACHING CONSEQUENCES””The court ruling has far-reaching consequences for fiscal policy in Germany,” said Clemens Fuest, President of the Ifo economic institute.”There are significant constraints for federal budgets in coming years in terms of spending on government support for decarbonisation.”Scholz’s centre-left Social Democrats (SPD), Habeck’s pro-spending Greens and Lindner’s fiscally cautious Free Democrats (FDP) agreed in December 2021 to transfer the pandemic debt to a climate fund. The move allowed the parties to make the most of a temporary, pandemic-related suspension of borrowing limits in the constitution. This was done with the Second Supplementary Budget Act 2021, which retroactively amended the Budget Act for 2021. The constitutional court ruled that this act was incompatible with Germany’s Basic Law and so was void.In addition, the government changed the accounting principle by which borrowing counted against the budget deficit in the year it was actually done. Therefore, the 60 billion euros transfer counted only as a deficit in 2021, but not in the years 2023 and 2024 when most of the spending was supposed to occur. This enabled Lindner to return this year to the debt brake rule, which restricts the German public deficit to 0.35% of GDP. The rule was suspended due to the pandemic from 2020 to 2022. “This valve is now closed,” Commerzbank (ETR:CBKG)’s senior economist Ralph Solveen said. “It will certainly not be easy to resolve this conflict in the ongoing final consultations for the 2024 budget.” Germany’s 2024 budget and financial plans through 2027 are to be finalised on Friday, as Germany curbs spending that surged in response to COVID-19 and the Ukraine war. Habeck had previously warned that a negative ruling would “sweep the rug from underneath” the government’s plans to stabilise the economy. Friedrich Merz, whose main opposition Christian Democratic Union party had launched the lawsuit against the government, said the ruling had stopped what he called “the self-service mentality” of the government and strengthened the debt brake. “A key cornerstone of the government’s budget and financial planning is collapsing,” he told local media. ($1 = 0.9357 euros) More

Shares of the company rose nearly 6% in premarket trade as its quarterly revenue also beat Wall Street estimates, providing early signs of recovery on the back of a change in management.The company had said on Monday it would delay its first-quarter filing with the U.S. securities regulator due to a goodwill impairment charge of about $700 million related to acquisitions in its consumer health and biomodalities unit, but would file preliminary results on Wednesday.Catalent (NYSE:CTLT) has already delayed its other results several times this year to account for production snags at some of its plants.The company recorded a net loss of $715 million for the quarter, which includes the goodwill impairment charge.On an adjusted basis, Catalent recorded a net loss of $19 million, or 10 cents per share. Analysts had expected a loss of 14 cents per share, according to LSEG data.Preliminary revenue for the first quarter fell 4%, to $982 million, but beat analysts’ average estimate of $939.14 million. More

LONDON (Reuters) -Santa Claus may not have as much to give this year because hard up shoppers in Europe and the United States are prioritizing food and household staples, global toy makers and industry experts said.Consumers worldwide have struggled to cope with high inflation and sluggish economic growth. The holiday season, which begins with Black Friday at the end of November and lasts roughly until the end of December, is expected to be especially tough for retailers selling discretionary items, executives say.Favourites such as Barbie dolls, Transformers action figures and Hot Wheels cars will still be at the top of children’s wish list, said Loo Wee Teck, consumer electronics industry manager at Euromonitor International.But many parents can’t afford them this year, according to executives. The top selling Barbie doll on Amazon (NASDAQ:AMZN), “Barbie Pop Reveal”, currently costs parents 19.99 pounds ($24.89). Meanwhile, Hot Wheels’ Scorpion play set was 35 pounds in 2020, according to parent blogs, but the same toy is about 60 pounds on Amazon.co.uk this year.”The most important thing for people this holiday is to have food on the table for their families,” Isaac Larian, CEO of Bratz doll maker MGA Entertainment, said in an interview.Toymakers Hasbro (NASDAQ:HAS) and Mattel (NASDAQ:MAT) have already warned of weaker industry sales. But trading could prove even tougher than expected, executives at four toymakers and experts told Reuters.Larian is expecting holiday sales at his company, which also makes Little Tikes toys and sells products across Europe and the United States, to decline by 10-12% worldwide versus last year.Demand in the lead up to Christmas will be “smaller” than last year, said Nic Aldridge, managing director at Bandai, the maker of Tamagotchi virtual pets.Aldridge anticipates more price cuts as retailers look to shift older products.”The was an abundance of supply from previous years so there is a lot of clearance stock and a lot of deep discounting,” he said.BLACK FRIDAY OFFERS CLUESGlobal sales of action figures like Transformers and Spiderman are projected to decline by 2% this year, Euromonitorforecasts.Anticipating the lower demand and already holding surplus inventory, many retailers ordered in less product than usual this year. That means products that are in demand may sell out quickly. Black Friday will give retailers an early indication.”We are seeing some early Black Friday sales start just now,” Barbie maker Mattel’s president and chief commercial officer, Steve Totzke, told Reuters on Monday.Mattel’s inventory levels at the end of the third quarter declined by double-digit percentage versus the prior year, with weeks of supply down high single digits, it said last month.MGA Entertainment ordered and made less product, Larian said, because it wanted to be “cautious and conservative” but now expects to run out of some new toys as a result.U.S. imports of toys fell by 32% year over year in the three months to Aug. 31, 2023 in dollar terms, according to S&P Global Market Intelligence’s trade data firm Panjiva. That’s usually a key ordering period for holiday stock.      Shipments by sea – measured by number of containers – fell by 8% in September.”The market for toys has been declining for the whole year,” said Florian Sieber, CEO of German toy maker Simba. Demand from consumers in Europe is lower than last year and last year was already down from the previous year, Sieber added.Still, some anticipate a late surge in demand.”We are expecting a good holiday season for Mattel,” Totzke said. “We expect to continue to gain share throughout the holiday season.”Frédérique Tutt, Global Toys Advisor at data firm Circana, formerly NPD, said toy sales were down about 7% year-on-year in countries it tracks in the first nine months of the year, but that she expects shoppers to come through in the three weeks before Christmas. The categories with the best performance to date are games and puzzles, plush, building sets and vehicles, she said. “There’ll be some money set aside for toys,” said Jerry Storch, chief executive officer of consultancy Storch Advisors and former CEO of Toys-R-Us and Hudson (NYSE:HUD)’s Bay Co. “But it’s a reality that there won’t be as many toys sold this year as last year.”($1 = 0.8032 pounds) More