Economy

Consumers expect the inflation rate a year from now to be 5.4%, the lowest number in a year and a decline from 5.75% in August, according to a New York Fed survey.
Respondents also indicated that they see household spending growth of 6%. That’s the lowest level since January and the biggest one-month decline ever.

A gasoline nozzle pumps gas into a vehicle in Los Angeles, California on August 23, 2022.
Frederic J. Brown | AFP | Getty Images

Inflation expectations and the outlook for household spending growth fell sharply in September as the Federal Reserve’s rate increases take hold in the U.S. economy.
Consumers expect the inflation rate a year from now to be 5.4%, the lowest number in a year and a decline from 5.75% in August, according to the latest New York Fed Survey of Consumer Expectations.

That level peaked at 6.8% in June and has been coming down since as the central bank has instituted a series of rate hikes totaling 3 percentage points. Markets largely expect the Fed to continue raising rates until it brings inflation down to its long-run target of 2%.
While the near-term outlook for inflation was improving, respondents also indicated that they see household spending growth of 6% for the next year, a steep fall from August’s 7.8% projection. That’s the lowest level since January and the biggest one-month decline ever in a data series going back to June 2013.

Consumers have been somewhat constrained by price increases moving near their fastest level in more than 40 years. Personal consumption expenditures in inflation-adjusted dollars rose just 0.1% in August while the savings rate declined, according to the Bureau of Economic Analysis.
Respondents did put a slightly higher number on their outlook for three-year inflation, moving that forecast to 2.9%, up 0.1 percentage point from August. Median five-year expectations rose to 2.2%, an increase of 0.2 percentage point but much closer to the Fed’s goal.
Elsewhere in the survey, respondents said they expect home prices to increase by just 2%, the lowest reading since June 2020 and reflective of a slowing real estate market. Consumers see gas prices rising by half a percentage point, and food to surge by 6.9%, a full percentage point increase from August’s survey.
The numbers come as the central bank is looking to arrest a cost-of-living surge pushed by Covid pandemic-related factors such as supply chain clogs. Unprecedented levels of fiscal and monetary stimulus also coincided with the inflation surge. The Fed has pulled back on its efforts, raising rates and beginning to reduce the size of the bond portfolio on its mammoth $8.8 trillion balance sheet.

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Frontier markets offer investors the promise of higher growth. Of late, that has come in the form of debt, not earnings. Financial conditions for emerging economies have tightened dramatically over the past six months, according to the IMF’s latest Global Financial Stability Report, published on Tuesday. The soaring dollar and rising interest rates threaten to push dozens of countries to the brink of sovereign default.The smallest emerging markets, so-called frontier markets, have the worst of it. Many are in Africa and, like Ghana and Zambia, have only sold their first foreign bonds in the past decade or so. But even larger economies, such as Brazil and India, which have been more resilient against the multiple crises of the past two years, are not immune.The ratios of debt to GDP and of debt service to government revenues in frontier markets have doubled since 2010. Bond maturity amounts rise steeply from next year, but access to international markets is limited. Less than $4bn in foreign currency bonds comes due this year; that will rise to $10bn next year and about $16bn for the next two years. Without renewed access, the IMF warns, they will default.Mercifully, the coming debt crises should not be systemic, unlike those that raged across the emerging world in the 1990s. Governments of larger economies from Asia to Latin America have built buffers of foreign reserves, developing deep local financial markets. Brazil and India, for example, borrow almost exclusively domestically.But local market conditions are tightening too, partly to fight inflation, partly as foreign investors have taken flight. They have removed $70bn from emerging market bond funds this year, split roughly equally between local and foreign currency bond funds.Even in their own currency, governments cannot borrow ad infinitum. Spending on debt service drains money from productive investment, stymying growth and stoking unrest.Fixing that problem calls for tough and unpopular fiscal decisions that local politicians have dodged for decades. With financial conditions the tightest since the global financial crisis, this will not change soon. More

The writer is an FT contributing editor and global chief economist at KrollAs the era of cheap money comes to an end amid a global central bank tightening cycle, UK pension funds have been among the first bodies to float to the surface. I am certain they will not be the last. Margin calls sparked by the funds’ liability-driven investing (LDI) forced the Bank of England back into quantitative easing. And on Tuesday the BoE widened its bond-buying programme, warning of a “material risk to UK financial stability”.The troubles brought on by Chancellor Kwasi Kwarteng’s “mini” Budget are a harbinger of unfortunate events to come across developed markets in the next year. Governments will spend more; investors will be the dominant disciplining force; and central banks will break other things in trying to break the back of inflation.Even as monetary authorities withdraw liquidity, war and the energy crisis will require developed markets to spend much more in the coming year. At the end of September, Germany, the pillar of fiscal rectitude, announced a €200bn investment package to cap gas prices for industry and consumers into 2024. While finance minister Christian Lindner insisted the extra euros will not be inflationary, German CPI soared to a 70-year high last month and bund yields have followed. Credit default swaps rose to the highest since April 2020 even as Lindner insisted Germany is “expressly not following Britain’s path” by committing to a new level of borrowing. An even bigger potential trigger point is Italy, which is particularly exposed to Russian gas, has little fiscal room and is already under pressure in bond markets despite support from ECB bond reinvestments. The yield on the benchmark 10-year note jumped the most since before the pandemic last week, following a fiscal warning from Moody’s Investors Service to the country’s likely new centre-right government. Price moves in the next year will be as swift and dramatic as they have been in the UK partly because markets are already highly stressed. The global central bank hiking cycle has tightened financial conditions and sapped liquidity. This is not a bug. It is the point of hiking rates. But as central banks continue hiking, something will probably break.With the Federal Reserve tightening more aggressively than other major central banks, the US dollar index (DXY index) has risen 17.4 per cent since the beginning of the year. This exports inflation from the US, forcing other countries to tighten more. And as the Fed considers a fourth consecutive 75-basis point hike, the US Treasury’s Office of Financial Research’s Financial Stress Index is near a two-year high, credit spreads have widened, corporate defaults more than doubled over the course of the summer and Bank of America announced its gauge measuring stress in credit markets was at a “borderline critical level”. What, then, is likely to break? Post-financial crisis, big US banks are much better capitalised. That is not always true in Europe. And on neither continent can regulators be confident about what lurks in the shadow banking sector. Even very liquid assets — such as gilts in the UK — may be a source of trouble. Investment grade corporate debt is an issue for the US. Overall, non-financial corporate debt has reached almost 80 per cent of US gross domestic product. Roughly one-third of this is rated BBB, the bottom rung for investment grade. Downgrades will force debt sales from a number of portfolios, sending prices down and potentially leading to UK-like margin calls.Another body to float to the surface in this tightening cycle may be alternative assets, including private equity and debt. Alternative assets have grown rapidly, almost doubling as a percentage of total financial assets since 2006. Their losses this year have been far less than those in public markets. While this may be a case of better investment strategies, it may also portend bigger losses to come.The UK’s experience reminds us that central banks have a very fine line to walk between fighting inflation and supporting financial stability. After years of bailouts, investors seem to be ignoring “this time we mean it” warnings and betting on a pivot. At the same time, governments forced to spend will be working at cross-purposes to the inflation fight. Opec+ has decided to pile on by cutting supply and raising energy prices again. Given oil is largely priced in dollars, the dollar remains the US currency, but the world’s problem. Market dislocations alone will not be enough for central banks to U-turn and cut rates. A financial crisis that kicks off a recession would, but that would be the worst possible way to lick inflation. More

Rising inflation sharply pushed up household food costs in September adding £643 to the average annual bill, according to new data. A growing number of Britons are also switching to cheaper imperfect products and own-label goods as a result of added financial pressures, according to research company Kantar on Tuesday. Grocery inflation rose to 13.9 per cent last month, its highest level since records began in 2008, the Kantar study showed. Official figures showed that in August food and non-alcoholic inflation rose to 13.1 per cent, up from 12.6 per cent in July and the highest since the Office for National Statistics began its records in 1988.UK inflation data for September will be released next week. Benjamin Nabarro, Citi chief UK economist, forecasts headline inflation to have risen to 10.2 in September, up from 9.9 in August. The fresh data comes as the IMF severely downgraded the UK economic outlook on Tuesday.The IMF forecast that the economy will largely stagnate next year on the back of higher inflation and raised borrowing costs after further monetary tightening by the Bank of England.Borrowing costs shot up after the government announced its tax-cutting “mini” Budget on September 23.Nabarro is more pessimistic than the IMF about the UK outlook and forecast that the economy will shrink in 2023 and in 2024, largely driven by a contraction in household spending. According to the Kantar data, consumers are already tightening their budgets as they face near-record price pressures for a generation. The research showed that the average household can expect their annual grocery bill to jump to £643, or £5,265. At a basket level, this amounts to an extra £3.04 on the typical food shop, which last year stood at about £21.89.Fraser McKevitt, head of retail and consumer insight at Kantar, said that the data show how the cost of living crisis “is still hitting people hard”.Shoppers are buying imperfect produce to help manage price rises, Kantar found, as sales of ranges like “Tesco Perfectly Imperfect” and “Morrisons Naturally Wonky” rose by an annual rate of 38 per cent.Britons are also switching to supermarkets that offer cheaper items. Asda brought an additional 417,000 customers through its doors in the past three months. Meanwhile, affordable brands Aldi and Lidl reported a strong growth in sales. This contrasted with a contraction in sales for Morrisons and Waitrose, which offer higher-end products.

Kantar bases its research on a year-on-year comparison of more than 75,000 products. The appetite for own-label goods has also gone up as consumers move away from more expensive products. Own-label sales increased by an annual rate of 8.1 per cent in September, while branded items declined by 0.7 per cent, Kantar reported.McKevitt said that Britons were “pretty savvy at seeking out best value and retailers are expanding their ranges to help them do this”. More

It was not familiar economic forces that caused the upheavals of recent years, but Covid and the war in Ukraine. This reminds us that the most destructive forces we know are indifferent nature and wicked humanity. In its latest World Economic Outlook, the IMF stresses the “cost of living crisis” and the economic slowdown in China. Yet the policy response to Covid, the unbalanced recovery from that disease and Vladimir Putin’s war caused the former, while China’s response to Covid caused the latter. Disease and war have indeed shaken our world.These huge surprises have also reminded us that it is impossible to forecast the economy. Often more illuminating is examination of how forecasts evolve. In this case, one can summarise the changes from previous forecasts quite simply: “Just about everything that could go wrong has.” In “fund-speak”, “downside risks” have materialised.What were those downside risks?First, inflation has been stronger and far more persistent than previously expected: as the WEO notes, “Global core inflation, measured by excluding food and energy prices, is expected to be 6.6 per cent on a fourth-quarter-over-fourth-quarter basis” this year. As a result, monetary policy has been tightened sharply.

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Second, the economic impact of Russia’s war on Ukraine has been greater than feared even six months ago. This is especially true for Europe, after the dramatic reductions in Russia’s gas exports.Finally, Covid is still able to cause havoc, at least in countries whose policies have not evolved sensibly, such as China, and possibly in Africa too, where vaccination rates are disturbingly low.An outcome of this combination of events is that the US has at the same time seen a sharp monetary tightening, because inflation has been so strong, and yet is in far better economic shape than Europe or China. This, plus its usual “safe haven” effect in times of trouble, has caused a sharp appreciation of the dollar. That is potentially devastating for borrowers with large dollar-denominated liabilities. There may not be a general debt crisis. But debt crises in vulnerable countries are certain.The result of all this has been a further downgrade of the forecasts. Neither a fall in global output nor one in global output per head is in the fund’s baseline forecast. But a contraction in real gross domestic product lasting for at least two consecutive quarters is expected at some point during 2022—23 in economies accounting for more than one-third of world GDP. The recent shocks will, as a result, inflict further losses in world output relative to pre-2020 forecasts.Moreover, risks are still on the downside. These include: a worsening of the impact of the war; a resurgence in Covid or some other pandemic; a monetary policy that is too forceful, causing a deep recession, or one that is too weak, allowing persistently high inflation; a huge property crash in China; bigger policy divergences among high-income economies, causing yet more financial stress; widespread debt crises in emerging and developing economies; and a further breakdown in co-operation among powerful countries. The last would further fragment the world economy and make impossible any joint approach to a wide range of global challenges, from debt through to climate.

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Russia’s war is beyond the reach of normal policy. Sanctions have been tried, but, predictably, have not changed its course, at least in the short run. China’s Covid policy is equally beyond the domain of global action. One assumes it will be changed at some point. When and how remain a mystery.So, what can and should be done?First, defeat inflation. As the fund puts it: “Yielding to pressure to slow the pace of tightening will only undermine credibility, allow inflation expectations to rise, and necessitate more aggressive and painful policy actions later. By reversing course, monetary policymakers will deliver only the pain of tightening, with none of the gain.” Expectations have remained anchored because people trust the central banks to do what they are supposed to do. They must.Second, co-ordinate fiscal and monetary policy. This is perfectly compatible with central bank independence. It makes no sense for these two aspects of macroeconomic policy to be fighting each other.Third, protect the vulnerable. The “cost of living” crisis is the worst possible time to slash spending on the weakest. The fund opposes price caps on energy. I disagree. But they must be aimed at lopping off extreme price movements and be fiscally bearable.Fourth, develop a better framework for handling debt distress. Particularly important in this regard is close co-operation between China and the west. Systemic financial crises are another risk: frameworks need to be made comprehensive.Fifth, recognise that managing the world economy will require co-operation. An obvious example is Putin’s war. Is it impossible to persuade China that this disaster may threaten its interests, too?Finally, there is the biggest one: climate. The fund provides an encouraging analysis of this greatest of collective challenges, pointing out that the economic costs of immediate and decisive action to reduce emissions are small, particularly when set against the benefits. Yet it is already desperately late. What we do (or, more likely, do not do) on emissions in the next decade may determine the future of this planet as a home for our own and other species.We should not let the urgent prevent action on the important. Nor should we let our differences prevent us from agreeing on what we must do. In the environmental crisis, natural forces combine with human folly. This is a formidable alliance. We must end [email protected] Martin Wolf with myFT and on Twitter More

Risks to the stability of the global financial system have “materially worsened”, the IMF has warned, cautioning that markets are at risk of a “disorderly repricing” that will hit emerging and developing countries most severely.In its twice-yearly Global Financial Stability Report, the multilateral lender said the surge in global borrowing costs, coupled with poor trading conditions and souring growth prospects, threatened to unmask the financial system’s fragility.“There certainly are many vulnerabilities out there,” Tobias Adrian, head of monetary and capital markets at the IMF, told the Financial Times. “When interest rates increase very rapidly, these vulnerabilities are exposed.” The report adds to a chorus of warnings that one of the most aggressive campaigns to tighten monetary policy in decades could trigger further volatility and a broad-based sell-off across asset markets.Signs of financial stress have already begun to crop up globally. Bond and stock prices have fallen sharply as central banks across advanced and emerging economies ratchet up interest rates to combat the worst inflation in decades. The dollar has soared in value against most currencies, forcing investors to pay a larger premium for funding in the US currency. Adrian said so far global financial markets were still functioning well, but warned that “pockets of disorderly tightening” could morph into something more worrisome.“We have seen differentiation across the risk spectrum today,” he said in an interview. “What I worry about is that there could be a broader base — a risk-off event — where it’s not just the riskier spectrum that sees wider spreads or wider risk premia, but also the safer issuers.”UK financial markets recently teetered on the verge of collapse after the government announced a plan to implement £45bn of debt-funded tax cuts late last month. The resulting sterling crash and surge in borrowing costs forced the Bank of England to step in to avert an even worse financial fallout led by pension funds using liability-driven investing strategies. While the central bank’s interventions helped to soothe markets initially, the measures, coupled with those from the government, have not fully reassured investors, igniting another lurch higher in government bond yields on Monday. Adrian said the IMF, which had criticised the UK government’s plan, “fully endorsed” the steps taken by the BoE and said its efforts to stabilise the financial system did not run counter to its monetary policy goals of returning inflation to the 2 per cent target from its current level of almost five times that amount. “It’s possible to ensure financial stability while tightening monetary policy,” he added. “You should be able to target certain segments of the market with financial stability issues, while tightening the overall stance.”Flagging their role as lenders of last resort, Adrian said central banks should step in when a shock became a “systemic concern”.

Indebted emerging and frontier economies are particularly vulnerable to a seizing up of global financial conditions. The government bonds of 14 countries in this category already trade in distressed territory, meaning spreads are more than 1,000 basis points above US Treasuries. An additional six have already defaulted or are working out debt restructuring agreements with creditors, including Zambia and Sri Lanka.Last week, Kristalina Georgieva, head of the IMF, said there would “inevitably” be additional defaults.“Both official creditors and the private sector, please come together. Face the music.” According to stress tests run by the IMF — which gauged countries’ abilities to weather a “severe” economic downturn featuring a 2023 global recession, unanchored inflation expectations, a disorderly tightening of financial conditions and prolonged supply chain disruptions due to Covid-19 and the war in Ukraine — nearly a third of emerging market banks will be undercapitalised. Lenders in advanced economies fared far better, the researchers found.Non-bank financial institutions also required enhanced monitoring, the fund said, calling for increased scrutiny of leverage exposure and greater transparency. More

High levels of inflation will persist longer in Britain than in almost all other advanced economies, the IMF warned as it took aim at Kwasi Kwarteng’s unfunded tax cuts. UK inflation will also be the highest in the G7 at the end of 2023, while in the 19-member eurozone, only Slovakia would have a higher inflation rate by the end of 2023, the fund predicted on Tuesday, laying the blame squarely at the feet of the chancellor. Kwarteng, who is set to travel to Washington this week for the IMF annual meetings, faces the accusation that his tax policies will force the Bank of England to raise interest rates to offset the inflationary pressure. Instead of boosting growth, the IMF made it clear it thought the government’s policies ran a serious risk of provoking a deeper downturn once inflation had stayed too high for too long. In its twice-yearly World Economic Outlook, the fund said Kwarteng’s fiscal package came too late for inclusion in its forecasts, but it was “complicating the fight against inflation”.Its UK forecast showed growth slowing from 7.4 per cent in 2021, to 3.6 per cent in 2022 and only 0.3 per cent in 2023. The IMF said it would have lifted its estimate for the 2023 growth rate “somewhat” if it had known about the “mini” Budget earlier, but that would also have raised inflation. The fund forecast that UK inflation would remain high at 6.3 per cent by the end of 2023, more than every member of the eurozone apart from Slovakia. In its Global Financial Stability Report, the fund also noted that financial markets had taken a dim view of Britain’s inflation prospects, with futures markets predicting there was a 70 per cent chance of UK inflation averaging more than 3 per cent a year during the next five years.But as it published the report, the IMF praised the UK government for seeing the error of its ways and beginning to take action to rectify the situation.Pierre-Olivier Gourinchas, IMF chief economist, told the Financial Times that since the “mini” Budget had received a drubbing by both the IMF and the financial markets, “the good news there is that the UK government has really sent all the right signals about having their Budget costed by OBR . . . so all of these things are going in the right direction”.But he added that did not make it easy for the government. “Markets are looking at these elevated debt levels, they’re seeing interest rates rising, they’re thinking, ‘well, it’s going to be harder to sustain elevated debt levels [and] debt should be coming down’,” Gourinchas said.Countries should not follow the example of the UK, he added. “Doing otherwise will only prolong the fight to bring inflation down, risk de-anchoring inflation expectations, increase funding costs, and stoke further financial instability, complicating the task of fiscal as well as monetary and financial authorities, as recent events illustrated.”

The criticism marks a continuation of the IMF’s very public dressing down of prime minister Liz Truss’s economic strategy. In the wake of the fiscal statement late last month, the IMF issued a highly unusual statement, saying it was “closely monitoring recent economic developments in the UK” and that it did “not recommend large and untargeted fiscal packages”.The IMF’s comments came as it issued global forecasts highlighting the risk of the world economy sliding into recession with a global growth forecast for next year that is the lowest since 2001, apart from the year of the global financial crisis and the Covid-19 crisis. It said there was a string of challenges facing the global economy, ranging from China’s zero-Covid policy to the need to raise interest rates to battle inflation and the war in Ukraine pushing up food and energy prices. More

WASHINGTON (Reuters) – The International Monetary Fund on Tuesday cut its global growth forecast for 2023 amid colliding pressures from the war in Ukraine, high energy and food prices, inflation and sharply higher interest rates, warning that conditions could worsen significantly next year.The Fund said its latest World Economic Outlook forecasts show that a third of the world economy will likely contract by next year, marking a sobering start to the first in-person IMF and World Bank annual meetings in three years.”The three largest economies, the United States, China and the euro area will continue to stall,” IMF chief economist Pierre-Olivier Gourinchas said in a statement. “In short, the worst is yet to come, and for many people, 2023 will feel like a recession.”The IMF said global GDP growth next year will slow to 2.7%, compared to a 2.9% forecast in July, as higher interest rates slow the U.S. economy, Europe struggles with spiking gas prices and China contends with continued COVID-19 lockdowns and a weakening property sector.The Fund is keeping its 2022 growth forecast at 3.2%, reflecting stronger-than-expected output in Europe but a weaker performance in the United States, after torrid 6.0% global growth in 2021.U.S. growth this year will be a meager 1.6% – a 0.7 percentage point downgrade from July, reflecting an unexpected second-quarter GDP contraction. The IMF kept its 2023 U.S. growth forecast unchanged at 1.0%.A U.S. Treasury official said before the release of the IMF forecasts that the U.S. economy “remains quite resilient, even in the face of some significant global headwinds.”PRIORITY: INFLATIONThe IMF said its outlook was subject to a delicate balancing act by central banks to fight inflation without over-tightening, which could push the global economy into an “unnecessarily severe recession” and cause disruptions to financial markets and pain for developing countries. But it pointed squarely at controlling inflation as the bigger priority.”The hard-won credibility of central banks could be undermined if they misjudge yet again the stubborn persistence of inflation,” Gourinchas said. “This would prove much more detrimental to future macroeconomic stability.”The Fund forecast headline consumer price inflation peaking at 9.5% in the third quarter of 2022, declining to 4.7% by the fourth quarter of 2023.A “plausible combination of shocks” including a 30% spike in oil prices from current levels could darken the outlook considerably, the IMF said, pushing global growth down to 1.0% next year – a level associated with widely falling real incomes.Other components of this “downside scenario” include a steep drop-off in Chinese property sector investment, a sharp tightening of financial conditions brought on by emerging market currency depreciations and labor markets remaining overheated resulting in lower potential output.The IMF put a 25% probability of global growth falling below 2% next year – a phenomenon that has occurred only five times since 1970 – and said there was a more than 10% chance of a global GDP contraction.DOLLAR PRESSURESThese shocks could keep inflation elevated for longer, which in turn could keep upward pressure on the U.S. dollar, now at its strongest since the early 2000s. The IMF said this is pressuring emerging markets, and further dollar strength could increase the likelihood of debt distress for some countries.Emerging market debt relief is expected to be a major topic of discussion among the world’s global financial policymakers at the Washington meetings, and Gourinchas said now was the time for emerging markets to “batten down the hatches” to prepare for more difficult conditions. The appropriate policy for most was prioritizing monetary policy for price stability, letting currencies adjust and “conserving valuable foreign exchange reserves for when financial conditions really worsen.” More