Economy

U.K. Finance Minister Rachel Reeves on Wednesday announced the government would inject billions of pounds into defense, healthcare, infrastructure, and other areas of the economy.
Funding public spending in the absence of a growing economy, leaves the government with two options: raise money through taxation, or take on more debt.
Market watchers warned of a “snowball effect” if Reeves’s spending plans send further jitters through the bond market.

LONDON, UNITED KINGDOM – MARCH 26, 2025: Britain’s Chancellor of the Exchequer Rachel Reeves leaves 11 Downing Street ahead of the announcement of the Spring Statement in the House of Commons in London, United Kingdom on March 26, 2025. (Photo credit should read Wiktor Szymanowicz/Future Publishing via Getty Images)
Wiktor Szymanowicz | Future Publishing | Getty Images

Britain’s government is planning to ramp up public spending — but market watchers warn the proposals risk sending jitters through the bond market further inflating the country’s $143 billion-a-year interest payments.
U.K. Finance Minister Rachel Reeves on Wednesday announced the government would inject billions of pounds into defense, healthcare, infrastructure, and other areas of the economy, in the coming years. A day later, however, official data showed the U.K. economy shrank by a greater-than-expected 0.3% in April.

Funding public spending in the absence of a growing economy, leaves the government with two options: raise money through taxation, or take on more debt.
One way it can borrow is to issue bonds, known as gilts in the U.K., into the public market. By purchasing gilts, investors are essentially lending money to the government, with the yield on the bond representing the return the investor can expect to receive.
Gilt yields and prices move in opposite directions — so rising prices move yields lower, and vice versa. This year, gilt yields have seen volatile moves, with investors sensitive to geopolitical and macroeconomic instability.
The U.K. government’s long-term borrowing costs spiked to multi-decade highs in January, and the yield on 20- and 30-year gilts continues to hover firmly above 5%.

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Official estimates show the government is expected to spend more than £105 billion ($142.9 billion) paying interest on its national debt in the 2025 fiscal year — £9.4 billion higher than at the the time of the Autumn budget last year — and £111 billion in annual interest in 2026.

The government did not say on Wednesday how its newly unveiled spending hikes will be funded, and did not respond to CNBC’s request for comment about where the money will come from. However, in her Autumn Budget last year, Reeves outlined plans to hike both taxes and borrowing. Following the budget, the finance minister pledged not to raise taxes again during the current Labour government’s term in office, saying that the government “won’t have to do a budget like this ever again.”
Andrew Goodwin, chief U.K. economist at Oxford Economics, said Britain’s government may be forced to go even further with its spending plans, with NATO poised to hike its defense spending target for member states to 5% of GDP, and once a U-turn on winter fuel payments for the elderly and other possible welfare reforms are factored in.
Additionally, Goodwin said, the U.K.’s Office for Budget Responsibility is likely to make “unfavorable revisions” to its economic forecasts in July, which would lead to lower tax receipts and higher borrowing.
“If recent movements in financial market pricing hold, debt servicing costs will be around £2.5bn ($3.4 billion) higher than they were at the time of the Spring Statement,” Goodwin warned in a note on Wednesday.

‘Very fragile situation’

Mel Stride, who serves as the shadow Chancellor in the U.K.’s opposition government, told CNBC’s “Squawk Box Europe” on Thursday that the Spending Review raised questions about whether “a huge amount of borrowing” will be involved in funding the government’s fiscal strategies.
“[Government] borrowing is having consequences in terms of higher inflation in the U.K. … and therefore interest rates [are] higher for longer,” he said. “It’s adding to the debt mountain, the servicing costs upon which are running at 100 billion [pounds] a year, that’s twice what we spend on defense.”
“I’m afraid the overall economy is in a very weak position to withstand the kind of spending and borrowing that this government is announcing,” Stride added.

Stride argued that Reeves will “almost certainly” have to raise taxes again in her next budget announcement due in the autumn.
“We’ve ended up in a very fragile situation, particularly when you’ve got the tariffs around the world,” he said.
Rufaro Chiriseri, head of fixed income for the British Isles at RBC Wealth Management, told CNBC that rising borrowing costs were putting Reeves’ “already small fiscal headroom at risk.”
“This reduced headroom could create a snowball effect, as investors could potentially become nervous to hold UK debt, which could lead to a further selloff until fiscal stability is restored,” he said.
Iain Barnes, Chief Investment Officer at Netwealth, also told CNBC on Thursday that the U.K. was in “a state of fiscal fragility, so room for manoeuvre is limited.”
“The market knows that if growth disappoints, then this year’s Budget may have to deliver higher taxes and increased borrowing to fund spending plans,” Barnes said.

However, April LaRusse, head of investment specialists at Insight Investment, argued there were ways for debt servicing burdens to be kept under control.
The U.K.’s Debt Management Office, which issues gilts, has scope to reshape issuance patters — the maturity and type of gilts issued — to help the government get its borrowing costs under control, she said.
“With the average yield on the 1-10 year gilts at c4% and the yield on the 15 year + gilts at 5.2% yield, there is scope to make the debt financing costs more affordable,” she explained.
However, LaRusse noted that debt interest payments for the U.K. government were estimated to reach the equivalent of around 3.5% of GDP this fiscal year, and that overspending could worsen the burden.
“This increase is driven not only by higher interest rates, which gradually translate into higher coupon payments, but also by elevated levels of government spending, compounding the fiscal burden,” she said. More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldDonald Trump’s latest trade threats pushed the dollar to its lowest level in three years on Thursday as rising worries over trade and geopolitics piled fresh pressure on the currency.The dollar was dragged lower after the US president told reporters he would send letters to trading partners outlining new tariff rates in the next couple of weeks, as the end of the 90-day pause on so-called “reciprocal” levies approaches next month. The greenback fell 0.9 per cent against a basket of its trading partners, including the pound and the euro. The move means the currency has fallen past the low it hit in the wake of Trump’s “liberation day” tariff blitz in early April and to its weakest level since March 2022.“[Trump’s] comment certainly points to renewed escalation in trade tensions ahead of the official deadline date,” said Derek Halpenny, an analyst at MUFG.Investors were also digesting a trade truce between US and China announced on Wednesday, and rising tensions between the US, Israel and Iran, with the Trump administration authorising dependants of military personnel to leave the Middle East.“We’ll see what happens,” Trump told reporters on Wednesday. “They [Iran] can’t have a nuclear weapon, very simple.”While trade tensions have continued to weigh on the dollar, stocks have since rebounded from their April plunge, with the S&P 500 index closing in on a fresh all-time high in recent days. Futures markets indicated a 0.3 per cent slide for the Wall Street benchmark on Thursday. Stocks also fell in Europe, with the broad Stoxx Europe 600 down 0.5 per cent.Analysts from Deutsche Bank suggested that some of Thursday’s dollar move could be attributed to news, revealed by the FT, that the US Pentagon was reviewing its 2021 submarine deal with the UK and Australia. “Reporting that the US is re-evaluating its participation in the Aukus defence pact is highly relevant for the dollar, in our view,” wrote head of FX research George Saravelos. “A weaker geopolitical alignment between the US and its allies undermines US inflows,” he said, adding that Australian investors had already raised the issue in meetings on Thursday morning. Lower-than-expected US inflation data on Wednesday and Thursday have also weighed on the dollar by opening the door to faster interest-rate cuts by the Federal Reserve. Futures markets are fully pricing in two quarter-point cuts from the Fed this year.By contrast, signals from the European Central Bank last week that it may be close to the end of its rate cutting cycle have pushed the euro higher. It climbed 1.2 per cent to $1.162 against the dollar, its strongest level since November 2021.The moves compounded a slide in the dollar that has taken it down about 10 per cent this year as economic worries over the trade war mix with concerns over a rising budget deficit and signs that some investors are reducing their exposure to US assets. A budgetary provision that would allow the government to raise taxes on foreign investments has added to the unease.“Foreigners are selling every rally in the dollar on policy chaos, ballooning debt and other threats to their investments,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.Weakness in the greenback “has much more room to run”, said Vasileios Gkionakis, senior economist at Aviva Investors. “The shift away from US exceptionalism is driving the US risk premium higher and is weighing on the value of the dollar.” More

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U.K. exports to the U.S. fell by highest figure on record in April, which the national statistics office attributed to Washington’s tariff policies.
The U.S. returned to a trade surplus in goods with the U.K. for the first time since March 2024, as its imports of British cars, metals and chemicals dropped.
The U.K.’s overall trade deficit to £11.5 billion from £6.6 billion, while figures also out Thursday showed the economy contracted by a weaker-than-expected 0.3% in April.

Container ships at Felixstowe port in Felixstowe, UK, on Wednesday, April 9, 2025.
Bloomberg | Bloomberg | Getty Images

U.K. goods exported to the U.S. dropped by £2 billion ($2.71 billion) in April, figures published by the Office for National Statistics on Thursday showed, marking the biggest monthly decrease since records began in 1997.
The value of Britain’s exports stateside was the lowest since February 2022 at £4.1 billion, with the ONS saying the shift was “likely linked to the implementation of tariffs on goods imported to the United States.” Cars, chemicals and metals exports all saw declines, the ONS said.

U.S. imports to the U.K. dipped by £400 million for the month to £4.7 billion, taking Washington back to a trade surplus in goods with the country for the first time since May 2024. Trade data shows U.K. businesses heavily ramped up their exports to the U.S. from the start of 2025 as rumors about the introduction of tariffs — eventually confirmed on April 2 — swirled.

The main goods sent by the U.K. to the U.S. include automotives, medicines, mechanical generators, scientific instruments and aircraft. The U.K. meanwhile has a strong appetite for U.S. oil, as well as its own pharmaceutical products and aircraft.
The U.K. and U.S. announced the outline of a trade deal at the start of May, but the agreement still imposed 10% blanket tariffs on British goods sent stateside and has not yet been fully implemented. U.S. President Donald’s Trump’s universal 25% duties on steel and aluminum are set to be slashed to zero for the U.K., while up to 100,000 British cars a year will be hit with a rate of 10% rather than 25%, but higher tariffs remain in force while final details of the deal are confirmed.
Trump has looked relatively favorably upon the U.K. during his second presidency while he has slammed other key trading partners such as the European Union. That’s in part because of his friendly relations with British Prime Minister Keir Starmer, but primarily because the U.K.-U.S. trade relationship in goods has historically been relatively balanced.
Overall, the U.K.’s trade deficit in goods rose by £4.4 billion to £60 billion in the three months to April, while its trade surplus in services dipped by £500 million to £48.5 billion.

That took the total trade deficit across both goods and services to £11.5 billion from £6.6 billion.

UK finance minister set on ‘renewing Britain’ as she unveils spending plans

The ONS noted in its release that monthly trade data could be “erratic” and that its next data set would account for the subsequently-agreed trade deal.
Figures also published by the ONS on Thursday showed the U.K. economy contracted by 0.3% in April, below the 0.1% expected by economists polled by Reuters. The U.K.’s dominant services sector was a weak point, shrinking 0.4%, while construction output increased by 0.9%.
It follows signs of a weakening U.K. labor market out earlier in the week, with job vacancies down 7.9%, and the employment rate rising to 4.6% from 4.5%. The rate of wage growth eased to 5.3% from 5.6%, with markets subsequently fully pricing in another half-percentage-point interest rate from the Bank of England before the end of the year.
Business sentiment remains on edge, due to tariffs and macroeconomic uncertainty, and because of government policies including a minimum wage hike, new worker protections and higher tax rates for employees.

Sanjay Raja, chief U.K. economist at Deutsche Bank, said the U.K. economy was “always on a collision course for a course correction after a super strong start to the year.”
Growth hit 0.7% in the first quarter, accelerating from 0.1% growth in the final quarter of 2024.
“While headwinds in April will likely soften in the coming months, they won’t dissipate fully. Despite the U.K.’s trade deal with the US, trade uncertainty is here to stay. The labor market continues to loosen too, which will weigh on household spending. And monetary policy remains restrictive, which will also drag on output,” Raja said in a note. More

.css-13hw3ep{margin-bottom:var(–o3-spacing-s);}.css-eh7lb7{margin:0;}Join FT EditOnly .css-79fz17{-webkit-text-decoration:none;text-decoration:none;}$4.99 per month.css-1h69zf4{margin:0;white-space:pre-wrap;font-family:var(–o3-type-body-base-font-family);font-weight:var(–o3-type-body-base-font-weight);font-size:var(–o3-type-body-base-font-size);line-height:var(–o3-type-body-base-line-height);color:var(–o3-color-use-case-support-inverse-text);}Access to eight surprising articles a day, hand-picked by FT editors. For seamless reading, access content via the FT Edit page on FT.com and receive the FT Edit newsletter. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of Free Lunch newsletter. Premium subscribers can sign up here to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersWe are coming up to a series of high-powered summits in quick succession: G7 leaders meet in Canada this weekend, Nato leaders gather in The Hague next week and the European Council of all EU leaders takes place later in the month. The general challenge at all such meetings these days is to avoid a bust-up with US President Donald Trump. But the most important specific issue that the “rest of the west” is struggling to manage as the US goes rogue is how to deal with Russia. At Nato, the hope is that members will commit to spending much more on defence. At the other summits, what I will be watching most closely is whether sanctions on Russia will be tightened — and whether this will happen with or without US co-operation. The EU has set things in motion with the punchy new sanctions package proposed by Brussels this week.The impact of further sanctions — and therefore the debate around imposing them — hinges on how badly they will hit Moscow’s resources. So today I take stock of the latest signs coming out of the Russian economy, which is developing not necessarily to the Kremlin’s advantage (to paraphrase Japan’s second world war Emperor Hirohito). Russia may not be quite the riddle wrapped in a mystery inside an enigma that Winston Churchill described in late 1939. But the current strength of the Russian economy remains difficult to assess. Partly that is because President Vladimir Putin’s regime has every interest in misrepresenting it (to his own people and to the outside world) as more robust than it is. Partly because something can be both strong and brittle: the most obvious ways in which the Russian economy could break — a credit crisis or a popular revolt — are virtually impossible to predict the timing of.A few months ago, I described Russia as a financial house of cards (though note that a house of cards can remain standing for a long time, even if it collapses quickly once it does). In an opposite take for the FT, Alexandra Prokopenko warns against the “dangerously misguided assumption that Russia’s economy will crack under the staggering cost of militarisation, anaemic growth and decreasing oil prices”.I don’t agree with Prokopenko’s suggestion that western policy is “anchored” in this assumption — my impression is that most western policy is resigned to the flawed premise that Putin can at best be contained, not defeated. But it is clearly unwise to base plan A on an expectation of economic collapse. That is compatible, however, with putting maximum pressure on Russia’s economy to erode as much as possible the material and political resources enabling Putin’s criminal war. And this is a time when such pressure should be particularly effective. A new report from the Center for Strategic and International Studies (CSIS), with a detailed up-to-date overview of the state of the Russian economy, shows that Putin has maxed out the benefits of “war Keynesianism” of fully mobilising domestic and available foreign resources. There is no slack left to exploit, and the damage to non-war-related sectors and activities is beginning to show — to the point where policy is increasingly shaped by the need to protect them and not just boost the war industries.Here are some of the signs that the economy is increasingly straining under the pressure of war management. My colleagues recently updated their investigation of the Russian labour market through salary offers in job ads, finding that the heady wage growth driven by recruitment to war and defence industries has begun to taper off. The CSIS reports several other signs that the war boom is waning. The economy has run out of workers to boost the labour force, because of the number of men killed or injured in attacking Ukraine or who emigrated to avoid having to do so. The CSIS authors assess that “somewhere between one to two million labourers are estimated to have functionally left Russia’s productive economy since February 2022”. They also assess that “non-military industrial production has stagnated since mid-2023”, and overall manufacturing, including defence, is slowing down, with some indicators pointing to outright contraction in the past few months.Then there are financial markets. Economists Thore Johnsen and Ole Gjølberg have drawn my attention to the Russian yield curve — the difference between long- and short-term government borrowing costs — which has been negative for more than a year. This unusual situation (the norm is that long-term borrowing costs more than short-term) is a common financial signal that an economy is entering recession.Some content could not load. Check your internet connection or browser settings.When I hosted the exiled Russian economist Sergei Guriev (now dean of the London Business School) for a podcast in February, he was then a little less sceptical than I was about Russia’s economic resilience. So I returned to him now for his updated view, which is that the seeming slowdown in the past few months is real. “Overall, the economy is now in significantly worse shape,” he told me, but “it is still not collapsing”. Lower oil revenues are a big part of the economic strain. Since the start of the year, a last-minute tightening of sanctions by the outgoing administration of Joe Biden and the fall in oil prices due to the economic uncertainty caused by Trump have combined to take a big bite out of Russia’s oil revenues. The public finances will rely on higher taxes and deficits than was foreseen a year or two ago.The CSIS report highlights how oil prices have always been a big political vulnerability for the Kremlin:For example, various western constraints and sanctions against the Soviet Union only truly delivered when combined with the collapse of energy prices in the mid-1980s . . . Low oil prices were also a significant factor in instigating the 1998 economic crisis . . . By some estimates, an oil price decline to $30 per barrel would deprive the Russian budget of an amount comparable to all current military expenditures, making the foreign trade balance negative in the context of continuing war and sanctions.It’s clear that the Russian leadership has realised it couldn’t go on as before. In January, I reported on Craig Kennedy’s study of the off-balance sheet financing of the war industry through state-directed subsidised bank loans. Kennedy tells me such lending stopped abruptly around the end of last year, presumably because it was recognised as unsustainable and harmful to the non-war-related sectors and broader macroeconomic management. But the result has been to make visible what was hidden, with the public budget now showing greater spending, deficits, and pressure to raise taxes. “So, if you’re not making major breakthroughs on the battlefield, and if the west manages to persuade Moscow that it will continue to provide adequate resources to Ukraine (Moscow doesn’t yet appear convinced it will), this rising financing risk could increasingly weigh on Russia’s war calculus,” Kennedy emailed me. This also means that more sanctions and better enforcement of existing ones would come at exactly the right time: the Russian economy is stumbling and an extra hit would have an outsize impact. What is more, the EU’s 18th package now under consideration aims at precisely the right things: lowering the price cap on oil exports that can be serviced by western shipping and insurance companies, putting the Nord Stream pipelines permanently out of business, imposing sanctions on more of the “shadow fleet” of oil tankers and cracking down further on the remaining financial channels open to Russian trade. There are more things that could be done. In particular, moving forward with segregating Russia’s hundreds of billions of reserves immobilised in the EU (mostly at the Euroclear depository in Belgium) so that they can be transferred to Ukraine as compensation for damage, and stopping other moneymakers for Moscow. The EU still imports Russian-made steel, for instance, which is not only a nice earner for Putin but keeps prices lower than they could be for Europe’s own steelmakers. If the Russian economy has proved resilient, it is because Ukraine’s western friends have refrained from putting it under as much pressure as they are capable of. And the expectation that they won’t do so plays a large part in how Putin chooses to pursue his assault on Ukraine. Change that expectation and you can turn the tide of the war.Other readablesRecommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldDonald Trump is poised to sign off crucial parts of the US-UK trade deal that will deliver lower tariffs for British car exports to America in return for improved access to the UK for US beef and ethanol producers.The “cars for agriculture” deal comes more than a month after Trump and Sir Keir Starmer signed off the five-page Economic Prosperity Deal in a televised Oval Office press conference on May 8.UK officials close to the talks said that the two sides were still negotiating over the section of the deal that Starmer said would deliver zero-tariff access to the US for UK steelmakers. The Starmer administration has come under political pressure at home over the speed of implementation of the agreement, as well as facing claims from the UK bioethanol industry that the offer of a large zero-tariff quota to US ethanol producers risks putting them out of business.UK officials are now hopeful that the deal could be signed by the end of the week. “The proclamation is sitting on the president’s desk,” said one, brushing off complaints about the pace of implementation. “Compared to other negotiations and agreements this is being done at lightning speed,” they added.Early on Thursday morning, US commerce secretary Howard Lutnick said the deal would become active “in the coming days”.He wrote on X: “It was a pleasure to meet our great ally, the Prime Minister of the UK, at Downing Street yesterday. “We agreed to implement our historic trade deal as soon as possible, starting with the agreed quotas for UK autos, and US beef and ethanol, becoming simultaneously active in the coming days.”The UK remains the only country to have signed a deal with the US following Trump’s imposition of global “reciprocal tariffs” on April 2.The US administration is currently locked in negotiations with other countries after instituting a 90-day pause that was due to expire on July 9. The tariffs are subject to a legal challenge in the US.Under the terms of the UK-US pact, Trump agreed to cut a 27.5 per cent tariff on cars to 10 per cent for the first 100,000 vehicles shipped from the UK, in a move that was widely welcomed by auto groups such as Jaguar Land Rover and Bentley.In return, the UK offered the US a zero-tariff quota of 13,000 tonnes of beef and 1.4bn litres of ethanol. UK officials confirmed that the legal steps were in place to operate the quotas simultaneously with the cuts to US car tariffs.The bosses of the UK’s only two bioethanol plants warned last month that the 1.4bn litre quota for cheaper US ethanol — equivalent to entire annual demand in the UK — would force them to close their plants.The two plants — Ensus in Wilton on Teesside, and Vivergo in Saltend, near Hull — manufacture bioethanol used in standard E10 petrol in the UK and were already making losses before the deal with the US was struck.The UK’s Department for Business and Trade said three weeks ago that it was “working closely” with the companies to “consider what options may be available” to support them, though so far no solutions had emerged.UK steelmakers are still waiting for the outcome of talks to finalise the size of the quotas as well as the conditions under which UK producers can benefit from a deal. The industry said it was not expecting an agreement until the end of the month at the earliest.Tata Steel, the UK’s largest producer, has warned that it might be excluded from the tariff-free deal with the US because of the origin of some of its products.  After closing its two blast furnaces at Port Talbot last year, Tata has been importing steel from its sister plants in India and the Netherlands for processing in the UK to then ship to customers.However, this could breach US import rules that require all steel to be “melted and poured” in the country from which it is imported. Other UK producers are also expected to be excluded from the deal if the condition is applied.UK Steel, the industry trade body, said it hoped the “US administration will recognise the particular circumstances of our industry, especially as the volumes we send to the US are a tiny proportion of US imports, but highly significant for UK producers”. More

This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. Yesterday the US and China announced that they have agreed to a framework to restore a trade-war truce. The details are sparse, but it appears that there will be concessions from China on rare earths and magnets, and the US will soften some technology export controls and visa restrictions. The market did not get excited: the S&P 500 finished the day down 0.3 per cent, and Chinese markets only rose a little. Email us: [email protected]. Inflation It made sense that April’s CPI report didn’t show much impact on prices from tariffs — it was the early days of Donald Trump’s tariff war, and it takes time for producers and retailers to make pricing decisions. May’s cooler-than-expected report takes a bit more explaining.Core inflation, which excludes energy and food, was up 2.8 per cent from the year before, the same as April. But Unhedged’s preferred measure, annualised monthly change in core CPI, came down, after picking up in April: While there were some indications that tariffs were pushing prices up — major appliances jumped more than 4 per cent from April, and toy prices climbed 1.3 per cent — the real surprise is the prices that didn’t rise. Apparel declined 0.4 per cent for the month. New and used-car prices fell, even as carmakers said they would have to increase prices. Smartphone prices fell, too.But it is, alas, too early to say that the good news will last. Given the wild inconsistencies in the administration’s tariffs policies, importers, wholesalers and retailers may still be working through pre-tariff inventories, or sacrificing some margin to hold market share while they wait and see where tariffs actually end up. With tariffs persisting and inventories falling, however, we think there may well be price pressure to come. There are also parts of the report that suggest some of the pre-tariff inflation is still lingering — setting up a sticky situation for the Federal Reserve. Services (excluding energy services) moderated but stayed stubbornly high at 3.6 per cent year-over-year, largely due to rent price increases. It’s possible that the Trump administration’s immigration policies are playing a part. Home and elderly care — an industry particularly reliant on immigrant labour, according to the Bureau of Labor Statistics — saw a 7.1 per cent annual increase.Every month where the prices of imported goods do not rise quickly is a good month. It is possible that the economy is flexible enough, companies’ margins thick enough, and Trump and his team timid enough, that tariffs will ultimately have a mild impact on prices. But we’ll need a few more months to be sure, and the market seems to agree. While the Fed-policy-sensitive two-year Treasury yield fell seven basis points after the CPI report, stocks were muted. The case for a rate cut is taking shape, but we’ll all have to hold our breath a little bit longer. (Kim)The distorted copper marketWhile the Trump administration has yet to announce a copper tariff, there is wide speculation that it is planning to. The reasons are straightforward. China has dominated copper smelting, or extracting copper from copper concentrate. And the administration appears to want copper to be mined and smelted in the US, and considers this a national security issue. China’s overcapacity does indeed introduce market distortions, but the threat of tariffs has only made the problems worse. The prospect of copper and other tariffs have pushed US copper prices up, well above prices in London:The divergence has resulted in massive flows of copper to the US. US manufacturers are buying to stay ahead of any possible tariff, and traders are taking advantage of the price arbitrage, then scrambling to cover their positions with physical settlements of the metal. Copper inventories in the US have hit a 5-year high:The arbitrage is affecting prices around the world. The London price has been rising to catch up. And copper buyers in Europe, Africa and Asia are facing shortages and paying a premium on top of the London rate.This comes on top of issues in China. The Chinese government has made a push to support its metal industry in recent years, resulting in a big surge in smelting capacity. This had led to a supply-demand imbalance, particularly in the market for unsmelted copper concentrate, said Andrew Cole, principal analyst for base metals at Fastmarkets. The combination of that pre-existing supply imbalance and the extra demand from the US is turning the economics of the smelting industry, at least in China, on its head. Typically, smelters charge a fee to turn the copper concentrate into refinable copper. That fee has now gone negative, meaning the smelters are paying miners and metals companies to get the concentrate in order to keep their operations running. So far, Chinese smelter output has not fallen in response. As Cole at Fastmarkets pointed out to Unhedged, “smelters have been very resilient . . . and we’ve had very few cutbacks”. Indeed, Chinese exports of finished copper have generally increased. And Chinese imports of copper concentrate have, too:According to Alice Fox, associate director for commodities strategy at Macquarie Group, the recent inversion in spot prices mostly reflects the Chinese market, but smelters elsewhere are also feeling the pinch:The negative price is the spot price; a lot of concentrates are sold under annual terms instead, which currently has a positive [smelting fee] of $21.50 per tonne. That is still very low; at that level smelters should be just about break-even . . . There is a concern over how long smelters can continue at low or negative margins. For vertically integrated smelters — most [of the smelting] outside of China — 90 per cent of their concentrate would be under the annual contract, at a positive [fee].Smelters also generate revenue from other metals, such as gold, which are byproducts of copper smelting. That should help them stay solvent. If Trump’s tariffs do take effect and more US smelting capacity is brought online — without a reduction in smelting capacity or a pick-up in copper mining elsewhere — competition between countries and smelters could become more fierce, which could flow through to copper prices. But there are rumblings that Chinese smelters may cut output. In the short term, however, many analysts are bullish on the copper price. From Fastmarkets’ Cole:There are bullish fundamental undercurrents in copper due to tariff-related supply distortions, compounded by the threat of supply disruptions created by extreme imbalances in copper’s raw material [concentrate] markets.The strange happenings in the copper market are just one instance of a problem visible elsewhere. State-supported Chinese overcapacity does create distortions; US tariff policy — actual or anticipated — introduces new imbalances.(Reiter)One good readNuclear economics.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More