Economy

Central bankers have been clear that they will do what it takes to control inflation. They are betting on a soft landing, but a bumpy one is possible.Jerome H. Powell, the Federal Reserve chair, emphasized this week that the central bank he leads could succeed in its quest to tame rapid inflation without causing unemployment to rise or setting off a recession. But he also acknowledged that such a benign outcome was not certain.“The historical record provides some grounds for optimism,” Mr. Powell said.That “some” is worth noting: While there may be hope, there is also reason to worry, given the Fed’s track record when it is in inflation-fighting mode.The Fed has at times managed to raise interest rates to cool down demand and weaken inflation without meaningfully harming the economy — Mr. Powell highlighted examples in 1965, 1984 and 1994. But those instances came amid much lower inflation, and without the ongoing shocks of a global pandemic and a war in Ukraine.The part Fed officials avoid saying out loud is that the central bank’s tools work by slowing down the economy, and weakening growth always comes with a risk of overdoing it. And while the Fed ushered in its first rate increase this month, some economists — and at least one Fed official — think it was too slow to start taking its foot off the gas. Some warn that the delay increases the chance it might have to overcorrect.The Fed has touched off recessions with past rate increases: It happened in the early 1980s, when Paul Volcker raised rates in a campaign to bring down very rapid inflation and sent unemployment rocketing painfully higher in the process.“There is no guarantee that there will be a recession, but you have high inflation, and if you’re serious about bringing it down quickly, you have to hike a lot,” said Roberto Perli, the head of global policy at Piper Sandler, an investment bank, and a former Fed economist. “The economy doesn’t like that. I think the risk is substantial.”It is no surprise that it can be difficult to cool down inflation while sustaining an economic expansion. Higher borrowing costs trickle through the economy by slowing the housing market, discouraging big purchases and prompting companies to cut expansion plans and hire fewer workers. That broad pullback weakens the labor market and slows wage growth, helping inflation to moderate. But the chain reaction plays out gradually, and its results can be seen only with a delay, so it is easy to lay on the brakes too hard.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.“No one expects that bringing about a soft landing will be straightforward in the current context — very little is straightforward in the current context,” Mr. Powell acknowledged during his remarks this week, adding, “My colleagues and I will do our very best to succeed in this challenging task.”Six of the eight Fed-rate-increase cycles since the early 1980s have ended in recession, though some of those were caused by external shocks — like the pandemic — and some by asset bubble implosions, including the 2007 housing crisis and the collapse in internet stocks in the early 2000s.Fed officials are hoping that today’s strong economy will help them avoid a rough landing. They point to the fact that labor markets are booming and consumer demand is solid, so lifting rates and tempering voracious buying might help supply to catch up and chill the economy without giving it freezer burn. Mr. Powell has argued that with so many open jobs per unemployed worker, the Fed might be able to slow down the labor market a bit without pushing the unemployment rate up.Loretta J. Mester, the president of the Federal Reserve Bank of Cleveland, said the Fed was not at a point where it had to decide between fighting inflation or pummeling growth.“Given where the economy is now, and where the risks are, to my mind the major economic challenge is inflation,” Ms. Mester told reporters on a call Wednesday. “I don’t see it as being a trade-off at this point.”James Bullard, the president of the Federal Reserve Bank of St. Louis, said in an interview that he thought the fact that the central bank had credibility as an inflation fighter — and was raising rates to defend that credibility — could allow it to adjust policy in a way that allowed demand to moderate without causing major economic disruptions.A FedEx worker picked up packages in New York this month. After a year of rapid inflation, there is no guarantee that longer-term inflation expectations will stay in check.DeSean McClinton-Holland for The New York TimesIn the 1980s, when Mr. Volcker was the Fed chair, the central bank had to convince the world that it was prepared to wrestle inflation under control after more than a decade of rapid price gains.“Do whatever it takes — I guess that’s the mantra of the day. I do think inflation is our No. 1 concern,” Mr. Bullard said. “I don’t think, however, that it is a Volcker-like situation.”Near-term consumer and market inflation expectations have shot higher over the past year as inflation has hit a 40-year high and continued to accelerate, but longer-term price growth expectations have nudged only slightly higher.If consumers and businesses anticipated rapid price increases year after year, that would be a troubling sign. Such expectations could become self-fulfilling if companies felt comfortable raising prices and consumers accepted those higher costs but asked for bigger paychecks to cover their rising expenses.Inflation F.A.Q.Card 1 of 6What is inflation? More

NEW YORK/LONDON (Reuters) – The International Monetary Fund’s executive board on Friday approved a $45 billion program for Argentina after more than a year of negotiations, two sources with direct knowledge said, allowing the South American grains exporter to avoid a costly default with the Washington-based lender.The agreement, which follows a staff-level agreement earlier in March, marks the 22nd IMF program for Argentina since it joined the Fund in 1956. It replaces a failed $57 billion program from 2018, the largest in the Fund’s history, for which Argentina still owes over $40 billion. More

The US has threatened to impose sanctions on individuals and companies outside Russia that are helping it circumvent western penalties imposed due to the war in Ukraine, in what would be a significant escalation of its efforts to financially isolate Moscow.Jake Sullivan, the US national security adviser, said Washington was ready to widen its net of economic and financial punishment around the world to include “secondary” sanctions. He was speaking to reporters on Air Force One as President Joe Biden travelled from Belgium to Poland on Friday.“We have a number of tools to ensure compliance, and one of those tools is the designation of individuals or entities in third-party jurisdictions who are not complying with US sanctions or are undertaking systematic efforts to weaken or evade them,” Sullivan said.He added: “We are prepared to use them if it becomes necessary.”Sullivan’s remarks come as the US and its allies are growing concerned that Russia will try to bypass the financial isolation imposed by the west by finding alternative sources of foreign currency and business deals to prop up their economy and the rouble.

The imposition of secondary sanctions would undercut any such efforts, but would potentially increase the negative spillover on the global economy, forcing companies and investors around the world to choose between doing business with the west or with Russia. Asked about the idea of secondary sanctions after a summit on Friday, European Commission president Ursula von der Leyen said the allies were now looking “deep” into the sanctions regime to identify any loopholes or efforts made by Russia to get around the penalties. They would then do everything within their own system to “close the loopholes and make circumvention impossible”. Sullivan’s threat to wield such sanctions comes amid an intense debate between the US and its European allies about how to handle China’s position on the Ukraine war. Some fear that Beijing may aid Russia both militarily and economically, including as a back door for sanctions evasion.

The US has warned Beijing that it will face “consequences” if it were to help Russia, but it has not specified the measures it would adopt. US and European leaders have been trying to co-ordinate their approach to Beijing in advance of an EU-China summit in early April. Speaking on CNBC on Friday, Treasury secretary Janet Yellen said it was premature to impose sanctions on China. “I don’t think that that’s necessary or appropriate at this point. We as senior administration officials are talking privately and quietly with China to make sure that they understand our position,” she added. “We would be very concerned if they were to supply weapons to Russia, or to try to evade the sanctions that we’ve put in place on the Russian financial system and the central bank. We don’t see that happening at this point.” Next week, Wally Adeyemo, the deputy US Treasury secretary, is heading to European countries including the UK, Belgium, France and Germany, to co-ordinate sanctions policy in connection with the Ukraine war. European countries have traditionally resisted the imposition of secondary sanctions by the US, most notably in the case of US measures related to Iran. Additional reporting by Sam Fleming in Brussels More

Setting a soft tone for the usually busy spring season, pending home sales, which measure signed contracts on existing homes, fell 4.1% in February compared with January.
This is the fourth straight month of declines in pending sales, which are an indicator of future closings, one to two months out.
The median monthly payment on a new mortgage is now taking up a much larger share of a typical consumer’s income. It jumped 8.3% in February compared with January.

A home with a sign indicating that it is under contract to be sold is seen in a neighborhood of downtown Washington.
Jim Bourg | Reuters

In a grim sign for the housing market’s busiest season, pending home sales, which measure signed contracts on existing homes, fell 4.1% in February compared with January, according to the National Association of Realtors.
Sales were down 5.4% compared with February 2021. Analysts were expecting a slight gain. This is the fourth straight month of declines in pending sales, which are an indicator of future closings, one to two months out.

Since this count is based on signed contracts in February, when mortgage rates really started to take off, it is a strong indicator of how the market is reacting to the new rate environment, especially as it is entering the crucial spring season.
Rates began rising in January and continued sharply higher in February. The average rate on the 30-year fixed mortgage is now more than a full percentage point higher than it was one year ago.
Regionally, pending sales rose 1.9% month to month in the Northeast but were down 9.2% from a year ago. In the Midwest, sales decreased 6.0% for the month and were down 5.2% from February 2021. In the South, sales fell 4.4% monthly and 4.3% annually, and in the West they were down 5.4% for the month and 5.3% from a year ago.
The jump in mortgage rates could not come at a worse time, as spring is historically the busiest season for the housing market.
“Most of my buyers are adjusting their target to buy the home they can afford at the higher rates,” said Paul Legere, a buyer’s agent with Joel Nelson Group in Washington, D.C. “There has been a pronounced sense of urgency to lock in a mortgage rate and get into a property. In my market at least, buyers are not electing to rent as an alternative.”

Today’s potential buyers are facing an expensive market. The median monthly payment on a new mortgage is now taking up a much larger share of a typical consumer’s income. It jumped 8.3% in February compared with January, according to a new index from the Mortgage Bankers Association. It is nearly 22% higher than it was in February 2021. For borrowers on the lower end of the market, that monthly payment is up nearly 10% month to month.
“The 30-year fixed-rate mortgage spiked 73 basis points from December 2021 through February 2022. Together with increased loan application amounts, a mortgage applicant’s median principal and interest payment in February jumped $127 from January and $337 from one year ago,” said Edward Seiler, MBA’s associate vice president of housing economics.
Buyers continue to face a tight and pricey market. Now they have to factor in inflation in other parts of their budgets, as well. List prices for homes reaccelerated after a brief reprieve in the fall of last year, according to Realtor.com.
“As we move into the spring season, markets remain clearly tilted in sellers’ favor,” said George Ratiu, senior economist at Realtor.com. “However, with mortgage rates moving toward 5%, we are seeing early signs of a shift in housing fundamentals, as many people looking for a home have hit a ceiling on their ability to afford a home.”

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Experts say the next Cold War might already have started.
The Russian invasion of Ukraine has posed a new challenge to a market recovering from the uncertainties of the pandemic.
In the longer term, the health of the market depends on where the crisis in Ukraine is headed next.

Just 60 years ago, the U.S. and the Soviet Union were at the height of a Cold War that nearly resulted in nuclear warfare. Today, experts say, the U.S. and its old foe, now Russia, are headed into another one. But it won’t be the same.
“I think the second Cold War has already started,” said Jason Schenker, president of Prestige Economics.

Angela Stent, senior advisor for Georgetown University’s Center for Eurasian, Russian and East European Studies, said, “I think that we are definitely headed into a 21st century version of the Cold War, but it’s going to be different from the Cold War that existed between 1949 and 1989.”
The unprecedented economic sanctions imposed against Russia following its invasion of Ukraine hint that the next Cold War will be mainly fought on the economic front.
“It’s hard to imagine a shooting war breaking out between Russia and the U.S.,” said Alan Gin, associate professor of economics at the University of San Diego. “I think that these sanctions will [continue] and then Russia will seek out other world partners, maybe like China and maybe some of the OPEC countries, and I think a lot of the battles then will be on the economic front.”
The crisis in Ukraine has already posed a new challenge to a market that has been recovering from the uncertainties of the pandemic.
“The market doesn’t like uncertainty, and this casts a lot of uncertainty in terms of the world economy,” said Gin.

In the longer term, the health of the market depends on where the crisis in Ukraine is headed next.
“If we were to see Kyiv fall or Ukraine fall, then we’d see equity markets take very big hits,” said Schenker. “If tactical nukes were to be deployed, the downside is immeasurable.”
Watch the video to find out more about how a new Cold War could impact the U.S. economy.

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The Biden administration’s plan to send more natural gas to Europe will be hampered by the lack of export and import terminals.HOUSTON — President Biden announced Friday that the United States would send more natural gas to Europe to help it break its dependence on Russian energy. But that plan will largely be symbolic, at least in the short run, because the United States doesn’t have enough capacity to export more gas and Europe doesn’t have the capacity to import significantly more.In recent months, American exporters, with President Biden’s encouragement, have already maximized the output of terminals that turn natural gas into a liquid easily shipped on large tankers. And they have diverted shipments originally bound for Asia to Europe.But energy experts said that building enough terminals on both sides of the Atlantic to significantly expand U.S. exports of liquefied natural gas, or L.N.G., to Europe could take two to five years. That reality is likely to limit the scope of the natural gas supply announcement that Mr. Biden and the European Commission president, Ursula von der Leyen, announced on Friday.“In the near term there are really no good options, other than begging an Asian buyer or two to give up their L.N.G. tanker for Europe,” said Robert McNally, who was an energy adviser to former President George W. Bush. But he added that once sufficient gas terminals were built, the United States could become the “arsenal for energy” that helps Europe break its dependence on Russia. Friday’s agreement, which calls on the United States to help the European Union secure an additional 15 billion cubic meters of liquefied natural gas this year, could also undermine efforts by Mr. Biden and European officials to combat climate change. Once new export and import terminals are built, they will probably keep operating for several decades, perpetuating the use of a fossil fuel much longer than many environmentalists consider sustainable for the planet’s well-being.For now, however, climate concerns appear to be taking a back seat as U.S. and European leaders seek to punish President Vladimir V. Putin of Russia for invading Ukraine by depriving him of billions of dollars in energy sales.The United States has already increased energy exports to Europe substantially. So far this year, nearly three-quarters of U.S. L.N.G. has gone to Europe, up from 34 percent for all of 2021. As prices for natural gas have soared in Europe, American companies have done everything they can to send more gas there. The Biden administration has helped by getting buyers in Asian countries like Japan and South Korea to forgo L.N.G. shipments so they could be sent to Europe.The United States has plenty of natural gas, much of it in shale fields from Pennsylvania to the Southwest. Gas bubbles out of the ground with oil from the Permian Basin, which straddles Texas and New Mexico, and producers there are gradually increasing their output of both oil and gas after greatly reducing production in the first year of the pandemic, when energy prices collapsed.But the big problem with sending Europe more energy is that natural gas, unlike crude oil, cannot easily be put on oceangoing ships. The gas has to first be chilled in an expensive process at export terminals, mostly on the Gulf Coast. The liquid gas is then poured into specialized tankers. When the ships arrive at their destination, the process is run in reverse to convert L.N.G. back into gas.A large export or import terminal can cost more than $1 billion, and planning, obtaining permits and completing construction can take years. There are seven export terminals in the United States and 28 large-scale import terminals in Europe, which also gets L.N.G. from suppliers like Qatar and Egypt.Some European countries, including Germany, have until recently been uninterested in building L.N.G. terminals because it was far cheaper to import gas by pipeline from Russia. Germany is now reviving plans to build its first L.N.G. import terminal on its northern coast.A pier in Wilhelmshaven, Germany, the port where Uniper, a German energy company, wanted to build a liquified natural gas terminal before it was shelved. Now Germany is reviving plans to build it.The New York Times“Europe’s need for gas far exceeds what the system can supply,” said Nikos Tsafos, an energy analyst at the Center for Strategic and International Studies in Washington. “Diplomacy can only do so much.”In the longer term, however, energy experts say the United States could do a lot to help Europe. Along with the European Union, Washington could provide loan guarantees for U.S. export and European import terminals to reduce costs and accelerate construction. Governments could require international lending institutions like the World Bank and the European Investment Bank to make natural gas terminals, pipelines and processing facilities a priority. And they could ease regulations that gas producers, pipeline builders and terminal developers argue have made it more difficult or expensive to build gas infrastructure.Charif Souki, executive chairman of Tellurian, a U.S. gas producer that is planning to build an export terminal in Louisiana, said he hoped the Biden administration would streamline permitting and environmental reviews “to make sure things happen quickly without micromanaging everything.” He added that the government could encourage banks and investors, some of whom have recently avoided oil and gas projects in an effort to burnish their climate credentials, to lend to projects like his.“If all the major banks in the U.S. and major institutions like BlackRock and Blackstone feel comfortable investing in hydrocarbons, and they are not going to be criticized, we will develop $100 billion worth of infrastructure we need,” Mr. Souki said.A handful of export terminals are under construction in the United States and could increase exports by roughly a third by 2026. Roughly a dozen U.S. export terminal projects have been approved by the Federal Energy Regulatory Commission but can’t go ahead until they secure financing from investors and lenders.“That’s the bottleneck,” Mr. Tsafos said.Roughly 10 European import terminals are being built or are in the planning stages in Italy, Belgium, Poland, Germany, Cyprus and Greece, but most still don’t have their financing lined up.The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More

Rising food prices are ringing alarm bells for households all over the world. UK food banks say they have never been busier. Supermarkets in Italy have reported panic buying. And in Iraq there have been bread price protests.Food costs were increasing even before the Ukraine war, driven by higher energy prices, transport bottlenecks and, in some countries, farm labour shortages. Now Russia’s invasion has triggered further rises and concerns about prolonged disruption in agriculture-rich Ukraine.Does this mean that it is a good time to invest in farm commodities? Especially as equity valuations remain high, despite the turmoil caused by the war, and rising inflation is putting pressure on bonds?It’s true that commodities have proved a decent investment at times of high inflation in the past. But you have to choose carefully as these can be volatile markets where prices can fall as fast as they rise.It’s no surprise that wheat prices are up more than 40 per cent since the start of the year, when Russia and Ukraine together supply some 30 per cent of world exports.

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Supply fears have spread across agricultural markets, with prices for corn, soyabeans and beef all well up this year.The concerns are even more acute in fertilisers, a key input, since Russia and its ally Belarus supply fully 40 per cent of global exports. CRU, a research company, calculates that prices are up by about 30 per cent, which may not sound too serious in the circumstances, until you consider they have risen threefold since early 2020. The International Food Policy Research Institute says: “The current conflict in Ukraine is likely to generate an immediate impact on global wheat market stability and, by disrupting natural gas and fertiliser markets, have negative impacts for many food producers.”Buying wheat wholesale — as you might gold — is obviously not practical for the average private investor. But the futures markets are very well developed and there are hundreds of exchange traded funds (ETFs) both for single crops, such as wheat, and for diversified baskets of agricultural commodities. BlackRock, the investment house which runs a stable of commodities funds, says that while “commodity trading can carry risk” it can offer “diversification and the potential for upside performance”.Still, before you take the plunge, look at some commodity charts to see how wild the price swings can be. How comfortable would you be on such a financial rollercoaster?For example, wheat gained 92 per cent in the five years between 2017 and 2021. But it dropped every year between 2013 and 2016, with a cumulative loss of 46 per cent. Over the decade to the end of 2021, you would have made around 15 per cent — not much of a reward for a stomach-churning ride.There is also an ethical question to consider. Throughout history, grain speculators have had a decidedly unfavourable reputation. Quite unfairly, say professional traders, who argue that financial investors give markets the liquidity needed to transmit price signals quickly. Yes, prices might spike if investors pile in, but the upswing gives farmers a bigger incentive to plant more and relieve any shortages. So at the end of the day, grains are cheaper and so is bread.After the last great grain price surge, in 2007-8, a report from the UN’s Food and Agriculture Organization found: “Available empirical evidence does not support claims that non-commercial traders have increased the volatility of grain prices.”Nevertheless, you may want to keep quiet about your grain stocks. Public prejudice runs deep. Well after the FAO published its research, leading charities, headed by Oxfam, successfully campaigned to drive some banks to close agricultural commodity funds.In any case, there are other options, notably equities. Scores of companies are active in food production, starting with some very well-known names. Nestlé, the largest by sales, is a core element of many a portfolio and fund. Other giants include PepsiCo and Unilever.Solid companies, right for uncertain times, I’m sure. But they may not give you the exposure you want to commodity markets. These groups sell products in which commodity costs are generally only a fraction of the final prices, margins and profits. Carlos Mera, head of agricommodities market research at Dutch bank Rabobank, says: “You may not see much of a change in the price of packaged bread at Waitrose, but in the Middle East prices are rising fast.”

Not surprisingly, Nestlé’s shares are barely changed since pre-crisis. They dropped when the fighting began (the company is big in Russia) but then bounced back (the Russia business is a small chunk of the whole).To get closer to the sharp end, you might consider the global grain trading companies. Chicago-based Archer Daniels Midland, which has investments worldwide, including in eastern Europe, has seen its shares rise 15 per cent since the conflict began and 26 per cent since the start of 2022. Bunge, a rival, has posted similar gains.Or how about fertiliser producers? The choice is trickier: some make fertiliser by mining and converting potash from their own reserves, so they have some protection against rising natural gas costs. But others use ammonia — a feedstock based on natural gas — and so are exposed. Nutrien, the Canadian potash giant, has seen its stock leap 37 per cent since Vladimir Putin’s tanks rolled in and 43 per cent since January 1. But shares in Yara, a Norwegian rival with gas-based feedstocks, are flat.Of course, there are numerous funds and investment trusts focused on agriculture, which will give you diversification as well as exposure, limiting your risks. For example, the MSCI Global Agriculture Producers ETF has names like Nutrien and Archer Daniels among its top three holdings, as well as US tractor maker Deere.Clearly, a lot depends on how long the Ukraine war lasts. Nobody knows, so no one can tell whether 10 per cent of this year’s Ukrainian harvest will be lost or 50 per cent. Planting is due to start in a few weeks.But high prices may persist, given all the other forces driving them up, especially energy costs. So even though the initial boost to the market has already made itself felt, there could be more to come. These are inflationary times. Stefan Wagstyl is editor of FT Money and FT Wealth. Email:[email protected]. Twitter:@stefanwagstyl More

Rough weather ahead. That was the message from Rishi Sunak’s Spring Statement this week. While the chancellor highlighted the support he was giving to many hard-pressed households, the reality is that most people will suffer a financial battering in the coming years as the UK suffers the toughest squeeze since the aftermath of the second world war. As the Office for Budget Responsibility, the official watchdog, says, after-tax household disposable incomes in the 2022-23 financial year will see “the largest fall in a single year since records began in 1956-57”.FT Money looks at how householders and savers will be affected by the chancellor’s fiscal measures, including the headline increase in national insurance thresholds, and the bleak outlook the UK faces. As Sunak said himself the day after he presented his statement to parliament, “I acknowledge there are uncertain times ahead.”The economy is still expected to grow modestly despite the impact of the Ukraine war, the after-effects of the pandemic, Brexit and surging inflation, especially in energy and food. The OBR forecasts a 3.8 per cent rise in the 2022 calendar year — down from an earlier 6 per cent prediction — and growth of just 1.8 per cent next year as the post-Covid recovery peters out.But the hit to our pockets will be as big as in the worst recessions, as HM Revenue & Customs grabs a bigger share of our collective economic output than at any time in more than 70 years. The pain is unevenly spread. The main beneficiaries of Sunak’s tax changes are lower-paid earners, with somebody on the minimum wage — around £16,500 a year — gaining £140. But those on the median wage of £27,500 a year will lose by £360 and those on £40,000 by £800, according to the Institute for Fiscal Studies (IFS), a think-tank.Much worse, in the view of the chancellor’s critics, those not in work, including the poorest, will gain very little. They will receive nothing from the £3,000 increase in the threshold for national insurance, Sunak’s top giveaway, as this is paid only by those in work. So pensioners and people on benefits, who struggle to pay escalating energy and food bills, miss out. Those who don’t have cars won’t gain from the 5p cut in fuel duty either.Spare a thought too for young people who have recently graduated or plan to do so in the next few years. Spring Statement documents show this year’s increases in student loan repayments could raise £11bn in 2022-23. That is nearly double the £6bn he is handing out by lifting national insurance thresholds. The chancellor is giving back only about a quarter of the tax increases he announced last year, aimed at dealing with Covid and financing the NHS. Paul Johnson, IFS director, says: “He continues, despite his rhetoric, to be a chancellor presiding over a very big increase in the tax burden. What he did was not enough even to stop the expected tax burden rising yet further.”If there is a glimmer of light at the end of the tunnel, it is Sunak’s promise that some of the money could be returned to taxpayers via a penny cut in the basic income tax rate, in 2024-25, just before the likely date of the next general election.But that’s a long way off. In the meantime, inflation-fuelled increases in tax revenues mean he has an extra £50bn unspent in 2021-22. Perhaps enough to provide extra relief to households later this year, if home budgets are punished even harder than expected.Inflation makes tax thresholds biteSoaring inflation, which economists say could reach 10 per cent this year, coupled with previously announced tax rises, damps the effect of this week’s giveaways.Sunak last year froze the thresholds at which basic and higher rate taxpayers pay income tax between April 2022 to April 2026, rather than planning to increase them in line with inflation as usually happened in the past.With annual inflation hitting a 30-year high of 6.2 per cent in February and rising, the extra tax collected from the freezing of the thresholds will far outweigh the cut in income tax, according to the OBR’s analysis. As a result, many more people than first anticipated in March 2021, when the chancellor announced the move, will be drawn into paying income tax in the first place — or paying a higher rate.The OBR predicted there would be 36.1mn basic rate income taxpayers in 2025-26, up from the 33.4mn it previously estimated in March 2021, a rise of 8.3 per cent. It forecast the number of higher-rate taxpayers would also increase to 6.8mn, compared with its previous estimate of 4.8mn — 42 per cent higher than would otherwise have been the case.Meanwhile, the chancellor announced that from July, he would boost the national insurance threshold at which people start paying national insurance contributions (NICs) from £9,880 to £12,570 — the same level at which income tax starts being levied. This will mean people will pay no tax or NICs on annual earnings below £12,570. Sunak said the move would help around 30mn working people, with a typical employee saving over £330 in the year from July.However, the measure needs to be weighed against Sunak’s decision to press ahead with plans to raise the NICs rate in April by 1.25 percentage points to finance health and social care.Amanda Tickel, head of tax at Deloitte, says the rise in the NICs threshold was the most expensive measure the chancellor announced on Wednesday. The measure is forecast to cost £25.9bn between 2022 and 2027. But this pales in comparison with the £86.6bn expected to be raised by the higher NICs rate over the same period.Still, the lowest earners will receive some respite from the decision to increase the threshold. The IFS found that in 2022-23 anyone earning between around £10,000 (the current NICs threshold) and £25,000 would pay less tax on their earnings.But those earning more than £25,000 would pay more, due to the combined effect of freezing income tax thresholds and increasing the NICs rate. The IFS adds that by 2025-26, “virtually all workers” will be paying more tax on their earnings than they would have paid without Sunak’s changes to rates and thresholds.“Essentially for every £4 the chancellor took off taxpayers last year, he’s saying we can have £1 back,” says Laith Khalaf, head of investment analysis at AJ Bell, citing OBR data. “Looking at the combined effect of personal tax changes announced since last year, taxpayers are still considerably out of pocket.”The chancellor is likely to have more tax measures planned for the autumn. A “tax plan” document released by the Treasury alongside the Spring Statement revealed a commitment to reviewing more than 1,000 existing tax reliefs and allowances.Tax advisers said reliefs on capital gains tax, inheritance tax and pensions tax were areas the government might probe. Andrew Barr, wealth planner at Succession Wealth, says: “Sunak is boxed in and is signalling his intentions now with the Budget and 2024 election on the horizon. Tax reform feels like it’s being lined up for the next Budget.”If nothing else, squeezing a bit more money out of these taxes would help pay for that promised basic income tax reduction.Pensioners under pressureThe cost-of-living crisis is expected to generate a £1.7bn tax haul for the Treasury as more over-55s dip into their pensions to keep their finances afloat.As rising fuel and energy prices continue to squeeze household incomes, the OBR forecast tax receipts from over-55s accessing defined contribution pensions, which are subject to income tax, to be £400mn higher in 2021-22 than the previous year.The OBR says the significant revision of the tax take from people making the most of so-called “pension freedoms” is a result of greater numbers of older workers turning to their pensions to ease financial strains of the pandemic and cost-of-living crisis.The pension reforms of 2014 gave people with defined contribution pensions the flexibility to withdraw their funds from the age of 55, subject to tax paid at their marginal rate.More over-50s have brought forward their retirement plans in the pandemic and gained early access to their pension pots, the OBR says. “The first three quarters of 2021-22 show that withdrawals are once again on course to outstrip expectations and are up almost a fifth on the same period in 2020-21”, it says. It also revises up its expected tax take from pension dippers by £800mn a year from 2022-2023, “as we assume that people will make use of earlier withdrawals to manage the rise in the cost of living this year, and that the steady state level of withdrawals will be higher than we had previously assumed”.Andrew Tully, technical director at Canada Life, a pension provider, says the OBR was setting the expectation that the cost of living crisis would be with us for “years to come” as people look to their pensions as a bank account. “This is understandable behaviour as people look to make ends meet but we need to remember that pensions are already likely to be stretched over a longer lifespan than previous generations and any withdrawals will need to be sustainable over this period,” he says.Pensioners received little in the way of good news from the chancellor, with no improvement on the 3.1 per cent increase in the state pension from next month — half the current rate of inflation. “Inevitably, there will be a rise in pensioner poverty,” says Baroness Altmann, a former pensions minister.Investment outlook subduedSunak had few surprises for investors. Money managers took Wednesday’s updated economic forecasts with a grain of salt, given that the full power of the economic shockwaves from Russia’s invasion of Ukraine have yet to be measured. “The reduction in growth forecasts and inflation predictions are probably not that reliable for this year given the uncertainty abounding, but the direction of both is clear; growth is going lower and inflation is going higher,” says Neil Birrell, chief investment officer at Premier Miton Investors. For many strategists, the statement also underscored the dilemma for the government and the Bank of England between the need to support growth and household finances and the imperative not to drive inflation any higher. “A big fiscal giveaway would throw fuel on inflationary fire,” says Guy Foster, chief strategist at wealth manager Brewin Dolphin. The City’s focus remains on Threadneedle Street rather than Westminster. William Hobbs, chief investment officer for Barclays Investment Solutions, says: “The big story of the day is still the tightrope that central banks have to walk, that is getting a lot more wobbly because of the stagflationary shock that the war in Ukraine is going to deal to the UK and European economy.”But despite the clouded outlook, Hobbs urged savers to “stay as calm as possible” and not fixate on short term market movements. “The worst thing that happens for individual investors at a time like this is that their time horizons shift,” he says. Gold and commodities offer the most obvious haven for investors seeking relief from the turbulence, but the prices of these assets have already shot up. The environment should also favour inflation-linked bonds, according to Hobbs. For stock pickers, Brewin Dolphin singled out companies that hold real assets such as property or infrastructure, as well as companies with strong brands, such as luxury group LVMH, whose customers are better able to absorb higher prices. “For companies, it depends on how good they are at passing on . . . price increases,” says Anna MacDonald, fund manager at Amati Global Investors. MacDonald says the chancellor’s decision to steer clear of a windfall tax on energy companies will have come as a relief to many investors. Energy majors, including BP and Shell, are key dividend payers that feature prominently in many income-focused strategies. She says: “It would not have been helpful for people’s portfolios.”The chancellor’s signals about his priorities for the autumn Budget also received a positive review from some investors, as Sunak plots a revamp of corporate taxation and R&D programmes, with an eye to boosting productivity. Claire Madden, managing partner of Connection Capital, welcomed Sunak’s “sentiment of recognising just how powerful the private sector is in terms of fuelling growth and filling up the coffers of the Treasury”. Mortgage rates risingThe chancellor left the housing market largely untouched but the worries over rising inflation, which he echoed, are causing banks and building societies to raise the costs of mortgages for homeowners and buyers. Anyone who secured an attractive long-term fixed-rate deal in 2020 or last year, when the Bank of England base rate fell to a historic low of 0.1 per cent, has little to fear in the short term.

But those remortgaging, taking out a new mortgage or raising more money will face higher costs as lenders push up their rates. Swap rates, which banks use to guide their pricing of home loans, have been rising in recent days, pointing to hardening expectations that more Bank of England rate rises are on the way. This week, lenders including Halifax, Lloyds, Barclays, HSBC and Santander put up their tracker or variable rates by 0.25 percentage points, according to data from finance website Moneyfacts. Virgin Money raised rates on some of its fixed-rate mortgages by 0.3 percentage points, while Coventry Building Society and NatWest lifted rates by 0.3 points. Aaron Strutt, product director at broker Trinity Financial, says banks’ funding costs are on the rise. “Some lenders have told us their two-year fixed rates are lower than the cost of funding them,” he says. “There is an expectation that mortgages will get much more expensive sooner rather than later and we are already getting used to seeing more significant rises.”Rates on shorter-term mortgages have risen faster than long-term deals, leading to an unusual situation where the rates on two and five-year fixes are almost the same. Strutt points to Santander charging 2.04 per cent for its two and five-year fixes.Greener homesOne concrete measure affecting households in the chancellor’s statement was on greening our homes. Householders looking to improve the energy efficiency of their homes by installing solar panels, heat pumps or insulation will see their costs fall by 5 per cent after Sunak scrapped VAT on these works from April. Wind and water turbines will also be added to the list of “energy saving materials” benefiting from the relief. The government said it would translate into savings of £1,000 on the installation of rooftop solar panels for the “typical family”, with another £300 in annual savings expected on energy bills. Its costs to the Exchequer are modest, however, at around £60mn a year. Scott Clay, a director at specialist lender Together, says the VAT cut is a step in the right direction. However, he adds, the overall costs of installation of eco-materials remain very high. “Families and property investors alike will need to find this finance from elsewhere.”Reporting by Emma Agyemang, Josephine Cumbo, Joshua Oliver, James Pickford and Stefan Wagstyl More