Economy

BONN, Germany (Reuters) – U.S. Treasury Secretary Janet Yellen on Wednesday confirmed she is advocating within the Biden administration for eliminating some tariffs on Chinese imports that “aren’t very strategic” but are hurting U.S. consumers and businesses.Yellen told a press conference ahead of a G7 finance ministers and central bank governors’ meeting that internal discussions are underway about the punitive “Section 301″ tariffs imposed by former U.S. president Donald Trump on hundreds of billions of dollars in Chinese goods.”Some of them, to me, seem as though they impose more harm on consumers and businesses and aren’t very strategic in the sense of addressing real issues we have with China,” she said, referring to unfair trade practices, national security issues or supply chain vulnerabilities.Reuters on Tuesday reported exclusively that U.S. President Joe Biden will have to resolve the heated debate among his aides over whether to cut the tariffs as his administration tries to battle high inflation, citing sources familiar with the conversations.While Yellen has argued for removing some of the tariffs, the sources said U.S. Trade Representative Katherine Tai prefers to keep them in place to develop a more strategic China trade agenda that protects U.S. jobs and China’s behavior in global markets. This approach could even include new strategic tariffs. Many of the goods subject to the punitive tariffs of up to 25% have little to do with the aims of the Trump administration’s Section 301 investigation into China’s misappropriation of U.S. technology and intellectual property. Tariffs on consumer goods from bicycles to apparel were imposed after China retaliated against initial rounds of Trump’s tariffs.Some economists, both inside and outside the administration, along with many business groups, have advocated for China tariff reductions as a way to help tame high inflation brought on by COVID-19 supply chain disruptions, a strong recovery and food and energy price spikes due to Russia’s invasion of Ukraine.Yellen has said that tariff cuts may help ease inflation but would not likely be a “game changer.””So I see a case not only because of inflation, but because there would be benefits to consumers and firms from…cutting some of them. But we’re having these discussions.”But she said she respects the opinions that she has heard in the tariff policy debates.”There are a variety of valid concerns,” she said. “And we really haven’t sorted it out yet — come to agreement on where to be where to be on tariffs.” More

LONDON (Reuters) – In volatile currency markets, one trade stands out as an easy bet: selling the British pound.With the world’s fifth-biggest economy grappling with a particularly unhealthy cocktail of slowing growth and surging inflation, the British currency has become the medium of choice to express a negative view. Official data on Wednesday showed inflation reached a 40-year high of 9% in April – more than four times the Bank of England’s 2% target while Britain’s worst cost of living crisis in three decades will not subside until late this year, according to a Reuters poll.And though the BoE was the first among major central banks to raise interest rates in December, now their predicted future path is far less steep than some of its global peers including the U.S. Federal Reserve.While the British economy’s problems are broadly similar to what other policymakers are grappling with, a few unique factors additionally weigh on the pound.One is the potential for a messy trade conflict with the European Union if Britain threatens to push ahead with a law to override parts of a post-Brexit trade deal for Northern Ireland.Any protracted trade war would threaten to further widen the current account deficit and subsequently weaken the currency. Then there is an increase in tax burdens, which followed massive temporary relief for struggling sectors during the pandemic and which has hit workers and employers already saddled with surging energy bills, adding to the drag on the economy. “The chance of a UK recession is all but guaranteed as there are just too many headwinds facing the economy,” said Wouter Sturkenboom, chief investment strategist for EMEA and APAC at Northern Trust (NASDAQ:NTRS) Asset Management. Money markets now expect only 120 basis points of cumulative rate hikes by the end of the year compared to the Fed’s nearly two full percentage points. Even a more cautious European Central Bank is expected to raise interest rates by 108 basis points over that period.Jane Foley, head of FX strategy at Rabobank says markets have slashed their UK rate hike expectations in recent weeks because recession risks have grown. Respondents in a Reuters poll assign a 35% probability of a recession within a year.Kaspar Hense, a senior portfolio manager at Bluebay Asset Management in London, said he was short the currency in his portfolios.”The pound has the weakest outlook among all the major currencies as the central bank’s reluctance to raise interest rates aggressively means it has the lowest inflation-adjusted yield among its rivals,” he said.As the war in Ukraine added more fuel to price pressures, UK growth expectations and consumer confidence tumbled because of the soaring inflation, the protracted conflict and concerns about the impact of extended COVID lockdowns on growth in China, Britain’s third biggest trading partner.Citibank indexes that measure how economic data fare compared with expectations are lower for Britain than for the rest of Europe or the United States, suggesting growing economic headwinds ahead.TURN FOR THE WORSEThat suggests any British rate hike cycle will be short-lived. Using the spread between three year and 1-year market interest rates, HSBC strategists predict interest rates will peak in June 2023, rising to 2.5%, and then rate cuts will follow.”The consumer outlook has taken a big turn for the worse, as the real income squeeze bites hard and this will make it very difficult for the Bank of England to deliver anything close to what is priced into the forward rates market,” HSBC said.HSBC now expects the pound to end the year at $1.20, some 8% weaker than its earlier $1.30 forecast.On Wednesday, the pound was trading at $1.24, down nearly 8% so far this year and not far from a May 2020 low of below $1.21 touched again last week.The British currency’s transformation into a poster child of the stagflation risks facing the global economy has been swift. In early December, hedge funds still were still betting against the dollar and favouring the pound. Six months later that has completely flipped to the biggest short pound bet in more than 2-1/2 years. The outlook remains bleak. Three-month British pound risk reversals which measure a ratio of sell to buy options are at one-month highs while expected price swings are holding near two-year highs. More

Rapid increases in the UK’s minimum wage helped to narrow inequality, but have done nothing to lift the country’s persistently poor productivity, according to an independent review of the policy.Under a policy set by the Conservative chancellor George Osborne, the UK’s minimum wage rose at twice the rate of median hourly pay between 2015 and 2020, raising pay either directly or indirectly for more than a third of workers and delivering wage gains well in advance of inflation.This raised average weekly pay without any significant hit to jobs or to workers’ chances of pay progression, the independent Low Pay Commission said in a report published on Wednesday. Yet the boost to earnings did not lead to any increase in the household incomes of low wage workers, because it was accompanied by freezes to the level of benefits and their tapering as earnings rose.Bryan Sanderson, the LPC’s chair, said the review’s findings were “a timely reminder of the policy’s achievements, as well as its limitations”, given that “the headwinds faced by businesses and workers alike are greater now than at any point since the national living wage’s introduction”.Rishi Sunak, the UK chancellor, has pointed to the latest increase in the minimum wage — whose main rate rose by 6.6 per cent to £9.50 in April — as one of the key steps the government has taken to lessen the hardship caused by soaring inflation. Low wage workers have also gained from a decision to slow the rate at which in-work benefits are withdrawn when their earnings rise.But minimum wage workers have still suffered a real terms pay cut. Inflation in April hit 9 per cent, its highest level in more than 40 years, according to data released on Wednesday. The poorest households, who spend a bigger proportion of their budget on food and energy, are already experiencing double digit inflation, according to analysis by the Institute for Fiscal Studies.

Meanwhile, Sunak has so far resisted calls for a more generous uprating of benefits than the 3.1 per cent increase put in place in April, arguing that unwieldy government IT systems made it too difficult to do at speed.The LPC’s review found the higher minimum wage had helped to narrow gender and ethnicity pay gaps, and to reduce regional inequalities. But the policy appears to have failed in one of the original goals set by ministers — encouraging employers to shift to a model of higher productivity.The LPC said its analysis showed no positive effect on productivity in the industries and regions where low pay was most prevalent. This was because raising productivity required costly investment — and smaller employers often said they had to cut investment in order to afford a higher wage bill. A significant minority had asked staff to work at a faster pace, given them more tasks or clamped down on absenteeism, but this intensification of work did not equate to higher productivity.The LPC’s findings are at odds with the government’s contention that post-Brexit labour shortages — which have led employers to raise wages rapidly in sectors such as hospitality and food processing — will speed its transition to a “high-skill, high productivity economy”. More

Chancellor Rishi Sunak has been warned by a cabinet colleague not to bow to pressure to impose a windfall tax on the UK oil and gas sector to help pay for a summer package of measures to cut household energy bills.Liz Truss, foreign secretary and a cabinet flag bearer for the Tory right, said on Wednesday that Sunak should be cutting taxes, adding: “The problem with a windfall tax is it makes it difficult to attract future investment into our country.”Sunak has previously made a similar argument to Truss, but he is under massive political pressure from Labour to levy a one-off charge on surging profits in the oil and sector, which the opposition party claims could raise £2bn to help offset rising domestic energy bills.Labour leader Sir Keir Starmer said on Wednesday that a U-turn by Sunak on the issue was “inevitable” and called on the chancellor to hold an “emergency Budget” to address the cost of living crisis.Foreign secretary Liz Truss in London on Wednesday. She said a windfall tax makes it ‘difficult to attract future investment into our country’ © Kirsty O’Connor/PAWith inflation hitting 9 per cent in April, Sunak is planning a significant intervention in July or early August, specifically aimed at helping the poorest households and “the squeezed middle” with their energy bills, according to Treasury insiders.The help could mainly come through higher welfare benefits or an increase to the £150 warm homes discount, said those briefed on Treasury discussions. The discount is currently paid to about 3mn of the poorest UK households.Torsten Bell, director of the Resolution Foundation think-tank, said Sunak would have to raise that discount to at least £600 in the autumn, when energy bills are expected to increase again, and expand eligibility to at least 6mn households. That could cost Sunak more than £3.5bn.The chancellor wants to wait until closer to August to make final decisions. At that point Ofgem, the energy regulator, will set the new price cap that takes effect in October, which the government fears could be anywhere between £2,600 and £3,000 a year on average per household, compared with £1,971 now.Some Treasury insiders said Sunak’s Spring Statement in March did not do enough to help the poor through the cost of living crisis.The chancellor’s allies said the summer package would also help middle- income households. Options would include a council tax rebate or tweaks to a government “loan” scheme that spreads the cost of higher energy bills over several years. Sunak would stage a much broader fiscal intervention in his autumn Budget, when he will be under intense Tory pressure to cut income tax or value added tax as part of a pre-election drive to lower the tax burden from a 70-year high.Truss’s negative comments to Sky News about a windfall tax on the UK oil and gas sector reflect the view of many Conservative MPs that Sunak should not raise any more taxes.Sunak said this week a windfall tax was “on the table” and government officials have warned it will happen unless energy companies rapidly expand their investment plans.One Treasury official said Sunak was frustrated that oil and gas companies were not helping themselves. BP boss Bernard Looney has called his company “a cash machine” and suggested a windfall tax would not affect the company’s investment plans.Offshore Energies UK, a trade body for the oil and gas industry, told the government this week that the sector expected to spend £200bn to £250bn in the country before the end of 2030. That compares to equivalent expenditure of £201bn between 2012 and 2021.The anticipated spending through to 2030 would include £90bn on oil and gas, £100bn on offshore wind, and about £20bn on carbon capture technology and hydrogen production, Offshore Energies UK said in a letter to business secretary Kwasi Kwarteng.Those figures include £18bn of spending by BP and £20bn to £25bn by Shell. BP has said it represents a commitment to deploy 15 to 20 per cent of its global capital expenditure in the UK, up from 10 to 15 per cent it previously invested in the country.Shell’s pledge is the first time Europe’s biggest energy company has outlined its UK spending. Smaller rival Neptune Energy has said it will spend more than $1bn in the UK over the next five years. Other companies, including TotalEnergies, which is expected to be the biggest oil and gas producer in the North Sea this year, according to consultants Wood Mackenzie, have yet to publish details of their planned spending. Total did not respond to a request for comment. More

Brussels wants to formalise proposals aimed at easing frictions on the border between Great Britain and Northern Ireland, as it seeks ways to address the stand-off with UK prime minister Boris Johnson. Maroš Šefčovič, the EU’s Brexit negotiator, told MEPs this week that he wants to turn a previously proposed EU package of solutions to the trade row into draft legislation to show that they provide workable ways around the impasse over the Northern Ireland Protocol, which governs post-Brexit trade on the island of Ireland. The move comes as the commission is urging the UK to engage over the protocol after London announced plans to table legislation of its own that would override parts of the deal.Šefčovič also told MEPs that the bloc was ready to take retaliatory measures if the UK went through with its threat to disapply measures in the protocol. Commission officials told the FT that they are working on a package of possible goods to hit with tariffs, although Brussels’ first step would probably be to restart legal action against London for failing to implement full border checks in Northern Ireland. It paused the process in July 2021 to support negotiations between the two sides.In the past the EU has also discussed scrapping the post-Brexit Trade and Cooperation Agreement should the UK ditch the protocol. This would introduce tariffs on all UK goods exports to the single market, and it remains a last-resort option for Brussels.

London says it has to act unilaterally on the deal because of political tensions in the region. On Friday, Northern Ireland’s Democratic Unionist party blocked the election of a new speaker at the region’s legislative assembly until the protocol was scrapped, effectively blocking the formation of an executive. The DUP and other unionists, who want to remain part of the UK, argue the deal undermines the region’s ties mainland Britain because it puts a trade border for goods in the Irish Sea to avoid one on the island of Ireland. However, Šefčovič has told the Financial Times that it would be “unacceptable for us” if the UK attempts to rewrite elements of an international agreement that was less than two years old.Šefčovič reiterated in the private meeting with MEPs that the EU would not renegotiate the protocol, but said the commission was ready to show its willingness to find solutions to problems affecting trade by transforming a package of ideas into legal text. The commission last year put forward legislative proposals to ensure the continued supply of British medicines not approved by the EU to Northern Ireland in a bid to address worries about access to drugs in the region. The new rules were adopted by the EU’s council of ministers in April following a vote in the European parliament. They were part of a wider package of measures Šefčovič published in October, the remainder of which he is now prepared to put into draft legislative form. These include creating “red and green channels”, in which goods that were clearly destined to remain inside Northern Ireland, such as supermarket deliveries, would only need to provide a single customs form per load. Brussels would also cut health checks on animals and food by 80 per cent. But the offer depends on the UK granting full, real-time access to its customs databases.EU ambassadors gave Šefčovič broad support for his plan at a meeting on Wednesday, according to diplomats briefed on the encounter.“There will be a calm and graduated response,” said one, who added: “several member states referenced the Ukraine/Russia war and were very annoyed that the UK would go down this route at the moment”.The European Commission declined to comment. More

The US government and international financial institutions including the IMF and World Bank have pledged tens of billions of dollars in food and fertiliser aid to poorer countries under a joint action plan to alleviate a growing global food crisis caused by soaring prices.US Treasury secretary Janet Yellen, speaking in Bonn at the G7 finance ministers’ meeting on Wednesday, said she was deeply concerned about the crisis that was unfolding. “Russia’s war against Ukraine has exacerbated the issue of food security for people around the world, particularly in emerging and developing countries,” she said. Yellen added that there was a “very real risk” that rising global market prices of food and fertiliser will “result in more people going hungry, further exacerbate price pressures and harm government fiscal and external positions”. Food inflation has surged around the world since Russian troops invaded Ukraine in late February. The impact of rising food prices and governments imposing food export bans following the start of the war have revived memories of the 2007-08 food crisis which hit poor countries disproportionately. The rise in hunger and social discontent during that crisis led to riots in more than 40 countries around the world. The US Treasury last month convened a meeting with multilateral institutions to discuss measures to tackle rising food insecurity. Among its own initiatives, the US has allocated new global emergency food assistance bringing the total since February to nearly $2.6bn. It is also looking to mitigate the global fertiliser shortage by boosting domestic production of crop nutrients through a $500mn US Department of Agriculture programme.Among the multilateral organisations, the Asian Development Bank will support efforts to feed Afghanistan and Sri Lanka alongside the Food and Agricultural Organization and World Food Programme (WFP). It said it is also exploring different options of trade finance and private sector loans to support food imports. Afghans receive food rations distributed by a South Korea humanitarian aid group in Kabul on Tuesday © Ebrahim Noroozi/APThe African Development Bank will use $1.5bn to help 20mn African farmers to gain access to fertiliser and seed through wholesalers and agricultural suppliers, while the World Bank will make $30bn available for the next 15 months. The Washington lender’s package will comprise $12bn towards new projects and about $18bn in the existing portfolio of projects linked to food and nutrition security.The IMF said it would provide policy advice, capacity development assistance and financial support either through programmes or emergency financing. It said one area of focus was to assist countries in their efforts to rapidly improve social safety nets to protect vulnerable households from the imminent threat of hunger. “With inflation reaching the highest levels seen in decades, vulnerable households in low and middle-income countries are most at risk of acute food insecurity,” said IMF managing director Kristalina Georgieva. “History has shown that hunger often triggers social unrest and violence,” she said.Arif Husain, chief economist at the WFP, said: “These resources will go a long way towards addressing the near-term consequences of this triple food, fuel and fertiliser crises for the world’s poorest people and economies.”One international food policy expert warned that the time lag between implementation and the policies bearing fruit could cause volatility in commodity markets. The measures could come into effect when the private sector has already reacted and production of crops has expanded, he warned, adding: “If so, these measures would exacerbate a possible leg down in prices as was the case in 1974 and in 2008.” More

Good evening,The cost of living crisis is pounding the British economy. Official figures released today showed a jump in inflation to 9 per cent, the highest level the country has seen in more than 40 years.The increase in prices, which is double the amount expected by the Bank of England just six months ago, is being driven by sharp rises in energy costs and the tightest labour market since the early 1970s — as yesterday’s employment figures showed. In fact, the buoyant labour market will make it harder for the BoE to tame inflation, according to the FT’s Delphine Strauss and Chris Giles.Stagflation is on the cards for several countries this year, but the UK is especially exposed to the toxic combination of high inflation and low growth. Britain is far from alone in having to tackle this issue, but it now holds the dubious honour of having the highest inflation rate in the G7 group of rich nations, as shown in the FT’s global inflation tracker.The impact of rising prices is being felt in that most British of institutions, the pub, with two of the largest operators warning today that they have had to axe discounts, reduce energy use and simplify their food menus to minimise price hikes for customers. Another sign of the times is a rise in home cooking, as seen in Premier Foods’ results below.The BoE has tried to deflect blame for the cost of living increase. The central bank’s governor Andrew Bailey cited global shocks when referring to the rise in prices and added that there “isn’t a lot we can do about it” rising to double-digits by the end of the year. A depressing conclusion to a depressing state of affairs.Latest newsErdoğan blocks Nato accession talks with Sweden and FinlandGerhard Schröder to be stripped of German parliamentary privilegesYellen targets Russian oil in EU talks with price cap and tariff proposalsFor up-to-the-minute news updates, visit our live blogNeed to know: the economyJapan’s economy shrank during the first three months of this year, weighed down by Covid-19 restrictions and soaring global commodity prices accelerated by the yen’s fall to a multi-decade low.Latest for the UK and EuropeThe pandemic has made it harder for the UK government to recruit and train staff for key regulatory bodies, making it more difficult for the country to capitalise fully on the benefits of leaving the EU. The National Audit Office found staffing shortages, including of veterinarians, lawyers and toxicologists, at the Competition and Markets Authority, the Health and Safety Executive and the Food Standards Agency.Global latestChinese president Xi Jinping’s zero-Covid policy is causing growing financial strain in the world’s second-largest economy, with the FT uncovering evidence that local authorities are now diverting funds from poverty alleviation and infrastructure spending to pay for mass coronavirus testing.International investors dumped $16bn worth of Chinese bonds in April, reflecting the decline in the renminbi’s value and more attractive returns on dollar debt. That marked the third straight month of net sales by offshore investors and contributed to a record Rmb235bn ($34.8bn) net outflow in renminbi-denominated debt since the beginning of 2022.Need to know: businessThe war in Ukraine has been blamed for scotching a merger between Commerzbank and UniCredit and thus further delaying European banking’s long-awaited cross-border consolidation wave.China’s crackdown on technology companies and tough Covid-19 restrictions have hit Tencent, the country’s most valuable company, which reported its slowest revenue growth on record for the three months to March.Peloton, whose internet-connected home exercise bikes made it a pandemic winner, has drawn strong demand from public and private investors — including Blackstone and Apollo — to secure a $750mn loan. The financing deal was necessary for Peloton, which has struggled since lockdowns were lifted, and last week reported widening losses and dwindling cash on its balance sheet.Another company that prospered during the pandemic was Premier Foods, manufacturer of British comfort food brands such as Mr Kipling cakes and Homepride sauces. It has continued its run of success post-lockdowns, reporting a boost to sales from rising inflation pushing British consumers to eat at home more often.JPMorgan shareholders have issued a stinging rebuke to chief executive Jamie Dimon and his senior management team over pay. At the Wall Street bank’s annual meeting, only 31 per cent of investors backed the $201.8mn remuneration plan for six senior executives, including a $50mn one-off special payment to Dimon. If New York mayor Eric Adams gets his way, Dimon will also be forced to ride the subway to work. It would certainly save him a few dollars on limousine rides and help Adams in his quest to get New Yorkers back on public transport and into their city centre offices.These are turbulent times for Hong Kong’s private jet market. The number of these aircraft kept in the city has shrunk significantly because of a triple whammy of pandemic border closures, the financial crisis at Evergrande —China’s second-largest property developer — and a US tax break allowing owners to write off the cost of such planes against federal taxes.The World of WorkRumours of the death of the office and city centre shopping have been greatly exaggerated, according to commercial property landlord British Land. The FTSE 100 company reported underlying profit was up by a quarter to £251mn, compared with the previous year, and said it was leasing space at the fastest pace in a decade.Movements such as #MeToo against sexual harassment and the worldwide Black Lives Matter protests that followed the murder of George Floyd two years ago this month have sharpened the focus on diversity. That shift is now driving demand for training to help senior management tackle the challenges and opportunities of supporting diversity, equity and inclusion at work.Get the latest worldwide picture with our vaccine trackerAnd finally . . . 

Robert Armstrong shows off the one that did not get away © Courtesy of Black Sand Fishing

What do Wall Street watchers do when they are not hunting with the pack? They go fishing. Robert Armstrong, writer of the Unhedged newsletter (which you can sign up to here), took time out from assessing credit market spreads to learn from a group of friends how to land yellowfin tuna in the idyllic coastal waters off Colombia. More

Wednesday was not a good time for chancellor Rishi Sunak and Bank of England governor Andrew Bailey to be steering the UK economy.As G7 finance ministers and central bank governors met in Bonn, Sunak and Bailey had the dubious honour of presiding over the worst inflation in the group of advanced economies. Official data released on Wednesday showed UK inflation surging to 9 per cent in April, and suggested Britain was enduring the worst of all worlds with its price rises compared with other countries. Like many European economies exposed to higher gas and electricity prices that have been exacerbated by Russia’s invasion of Ukraine, UK energy costs were 69 per cent higher in April compared with a year ago. The full effects of the war will be felt by British households in October, when the energy price cap is expected to be raised, in a move that is likely to take inflation towards 10 per cent in the autumn. Meanwhile, the UK labour market is red hot, with unemployment at a near 50-year low, and strong pay growth involving bonuses, according to official data released on Tuesday. In this sense, Britain’s economy is overheating in a similar way to the US’s, and interest rate rises will be needed to cool things down.

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Amid the escalating cost of living crisis, the UK’s one saving grace at the moment in international inflation comparisons is that British households allocate only 8.4 per cent of their spending to food, which is beginning to rise sharply in price. IMF studies show that in advanced economies the median proportion is 17 per cent, while in emerging markets it is 31 per cent. What will concern UK ministers and officials the most is that the country’s inflation problem has more signs of persistence than in many other European countries. Allan Monks, economist at JPMorgan, highlighted increasing evidence of high levels of inflation “bleeding” from the prices of energy and goods into core services. He said some of this was due to the hospitality industry resuming charging value added tax at 20 per cent after a period of relief during the coronavirus pandemic, but added: “The underlying gain [in services inflation] was nevertheless firm and indicates a growing domestic, and likely more persistent, component to inflation even as goods pricing moderates.”With the BoE having a 2 per cent annual inflation target, Kallum Pickering, economist at Berenberg Bank, noted how 80 per cent of the goods and services that the UK statistical agency monitors have price rises exceeding 3 per cent at the moment.

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Bailey said on Monday there was not much the BoE could do to stop UK inflation hitting 10 per cent because it was fuelled by global shocks including the Ukraine war and China’s zero-Covid policy, but the fact a wide array of goods and services are recording price rises well above the BoE’s 2 per cent target will be of serious concern inside the central bank.This situation underpins the case for further interest rate increases, according to Sandra Horsfield, economist at Investec. She said the spread of inflation to services “ups the ante even further for the Bank of England to respond” because it could not dodge responsibility in this area. “Along with [Tuesday’s] red-hot labour market report, the case for front-loading monetary tightening looks stronger by the day,” she added.The question for members of the BoE’s Monetary Policy Committee will be whether they can stick to the majority view at their May meeting for a limited number of interest rate rises in the short term, hoping most of the inflation will be extinguished within a year or so. The alternative is to be forced to raise rates significantly to ensure financial pain for households and businesses, and thereby curb actions by people and companies that are currently stoking inflation.The big worry for the BoE is that high inflation is becoming normal and expected by households, businesses and financial markets.It risks locking the UK into a so-called wage price spiral, where workers demand pay rises to match higher living costs and companies raise prices to protect their margins in a repeating, self-fulfilling process. If markets expect inflation to stay high, it gets built into financial contracts ranging from the cost of government debt to the price of infrastructure.

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As the BoE MPC said in its May monetary policy report, higher inflation expectations are a concern because if they stay too elevated, “wage and price-setting are not consistent with inflation returning to the 2 per cent target in the medium term”.It noted that whether looking at companies’ predictions of their ability to raise prices, households’ views of future inflation or values in financial markets, “expectations for inflation in two to three years’ time remain above historical averages”. The BoE said longer-term inflation expectations were little worse than three months ago, but that was not hugely reassuring because they were also up on normal levels. “The MPC will continue to monitor measures of inflation expectations very closely and, importantly, how inflation expectations appear to be affecting wage and price-setting,” it added. If the emerging signs that the UK has the worst-of-all-worlds inflation are confirmed, the BoE will have to raise interest rates significantly. The central bank has not come to that judgment yet, but further bad news on rising prices would force its hand. More