Economy

Good morning. Ethan here; Rob returns next week. Many thanks to my markets colleagues Kate Duguid, Eric Platt and Joe Rennison for their help in his absence.A month ago, and for many months before that, markets were having a grand argument about inflation. Would inflation be transitory or persistent? Was it pandemic-driven or more broad-based? Though contentious, it was an intellectual feast for those involved. Unhedged has pumped out a bazillion letters on the nuances and vagaries of the great inflation debate.These questions still matter to an extent, but the ground has shifted. Many economies’ fates now depend on political and military decisions made by world leaders. Market participants are reading sanctions law and eastern Europe experts, not economists. (Or, as one strategist told me, economists’ digests of sanctions law and eastern Europe experts.)It is in this context that I read Thursday’s consumer price inflation report. Below, I try to learn something from it. Also, your thoughts on oil spikes and stagflation. Email me: [email protected] shrug off the bad CPI reportHere’s the good news. Core inflation (ie, exempting volatile food and energy) fell a bit in February:Pandemic inflation anomalies are settling down. In month-over-month terms, used car prices dipped. Durable goods inflation decelerated sharply last month. Furniture and bedding prices, up some 17 per cent since 2021, were near flat.That dash of optimism was swamped by the bad news. Surging food and energy costs gave us Thursday’s headline number, a 7.9 per cent annualised CPI print. To state the obvious, inflation is hot. It is also getting stickier. As durable goods inflation relents, core services prices are accelerating (6.2 per cent annualised, versus 4.9 in January). Rent inflation, at 7.4 per cent, is sticking, too.Last month, Unhedged looked at the Atlanta Fed’s sticky price inflation index, which tracks items whose prices respond to market conditions more slowly. The measure has since decelerated from 7.5 to 6.5 per cent — cold comfort for the fearful:In sum, the inflation report offered plenty of fodder for a market freakout. Yet none happened. The S&P 500 was down, but barely. A hot CPI print was expected, and besides, there’s plenty else to fret about. BMO’s Yung-Yu Ma put it well:Eight per cent inflation almost flew under the radar because, one, it’s probably going to be higher next month. And two, what we believed a month ago to be the dynamics of these inflation drivers — it’s not that they’ve gone away, but new dynamics have now superseded them.Doughnuts illustrate the point. They were 4 per cent more expensive in February than in January. Grain prices have since hit record levels — something not captured in February’s CPI report. So expect blistering doughnut inflation in March and April, but what they’ll cost in December is unclear. If a settlement is reached in Ukraine and western sanctions are lifted, grain flows can resume. Doughnut prices would calm down. But in a world of indefinite economic war, all bets are off.Ma said that if this commodities spike is a one-off, US consumers can stomach it and inflation will probably peak in the summer. More painful would be if Russia and the west cannot come to an agreement, prompting further shocks. In both cases, more turmoil lies ahead. The Federal Reserve may have little choice but to tighten monetary policy steadily and accept inflation isn’t in its control. I admit these are hypotheticals. Scenario-planning seems about all you can do right now, as Phil Orlando of Federated Hermes told me:As investment professionals, we’re trained to study all the data and put together this beautiful plan of exactly what to do. And we’ve got this giant elephant in the room that we can’t quantify.A scary period in history makes for a disturbing time in markets. Be careful.Readers respond on oil shocks and stagflationTuesday’s letter on whether oil shocks ultimately fuel inflation generated the most mail in one day I’ve yet gotten. Writing about inflation tends to do that, for some reason.The traditional argument starts with the 1973 oil embargo, where an energy spike was the prelude to out-of-control inflation expectations and a nasty recession. The experience made the 1970s synonymous with stagflation. But some think expensive oil could as easily damp inflation over time by depressing demand and growth. Which is right?One reader, Thomas Mayer, thinks I missed the monetarist elephant in the room:Discussing this question without bringing in the monetary overhang created by excessive credit extension seems to me like performing Hamlet without the Prince of Denmark. Compare the present situation with that of the 1970s. It is frighteningly similar. At the beginning of the 1970s, economists disregarded the role of money in generating inflation like we do now. In the course of the 1970s, the profession rediscovered the ancient quantity theory of money and the associated quantity equation. Milton Friedman elevated it as “monetarist theory” to the dominant paradigm in economics during the decade. Paul Volcker used it to break the inflation spiral at the beginning of the 1980s. I wonder when the next Milton Friedman will come up.In other words, to focus on oil is to miss the point. Inflationary or not, oil’s impact is surely dwarfed by too much money chasing too few goods. This could be, but I’m not sure. Quantitative easing probably matters for inflation, but does it matter in the absence of fiscal expansion? If you know the answer, there’s an economics Nobel Prize waiting for you. Several readers flagged differences in labour power between the 1970s and today. Hasan Choudhury wrote:The thing I most notice about the various commentaries on stagflation is the role of labour unions. In the 1960s and 70s and into the early 80s, the workforce was much more unionised in both the UK, Europe and the US. This allowed them to enforce their higher wages demands. This time round, notwithstanding tight labour markets, labour is not as organised as in the previous period of high inflation caused by OPEC policy. I can’t see individual employees getting matching pay rises en masse as in the 70s.This is probably a big reason why most hawks don’t think 14 per cent inflation is imminent. Diminished labour power is a serious drag on how high inflation can go. “We’re risking a 1970s scenario” often is a claim about direction, not magnitude.Finally, a provocative suggestion from Nigel Hayes of EADA Business School:Under the circumstances, why don’t the EU (and Norway and the UK) and the US temporarily fix the price of oil and gas? Together they could perhaps provide 80 per cent of their energy needs, and even if the price was fixed at, say, 50 per cent of the global market price, the “temporarily nationalised” companies would still make substantial profits. This action would immediately undercut Russian gas supplies and perhaps break the consumer-led inflation spiral you discuss. Politically unacceptable? Perhaps. But it could be done on a temporary basis.Maybe this idea would just never work. But if there is any time where it would, it would surely be now.One good readHow Facebook’s crypto dreams fell apart. More

The UK economy bounced back quickly in January from the damage caused by the Omicron coronavirus outbreak, with a swift recovery in the services sector driving growth.Gross domestic product increased 0.8 per cent on the previous month, faster than analysts had expected, after shrinking 0.2 per cent in December, official data showed on Friday. This took the three-month-on-three-month growth rate to 1.1 per cent, also ahead of expectations.The Office for National Statistics said that on this monthly measure, GDP was 0.8 per cent above its pre-pandemic level. The recovery, however, has been uneven, with output in the health sector now more than 15 per cent above its January 2020 level, while consumer-facing services were well short of pre-pandemic activity levels. The figures confirm that the spread of the Omicron variant dealt only a brief blow to the UK’s recovery and will reinforce the case for the Bank of England’s Monetary Policy Committee to raise interest rates when it meets next week in the face of soaring inflation. They showed growth in the services sector was driven at the start of the year by a recovery in wholesale trade, expansion in information and communications technology and a rebound in the food and beverage sector as people began socialising again. But economists warned that the outlook for growth was darkening as the war in Ukraine fuels inflation, eating into household incomes and threatening further disruption to supply chains.Rishi Sunak, chancellor, said that despite the uncertainty caused by Russia’s invasion of Ukraine, government support over the course of the pandemic had “put our economy in a strong position to deal with current cost of living challenges”.But Suren Thiru, head of economics at the British Chambers of Commerce, said the figures had been “pushed into the rear-view mirror by renewed domestic and global shocks”. Yael Selfin, chief economist at advisory firm KPMG, said growth momentum was “likely to be derailed” by the war.

Samuel Tombs, at the consultancy Pantheon Macroeconomics, said that while it was a “safe bet” the MPC would raise interest rates to 0.75 per cent next week, the recovery could stall in the second quarter of 2022 as the end of free Covid-19 testing and widespread vaccinations hit output in the health sector, and the pressures on household finances mounted.Growth in the health sector, which has skewed GDP data in some previous months, accounted for 0.2 percentage points of January’s overall output growth, but this was largely due to GPs seeing more patients, with increases in the Test and Trace programme largely offset by a fall in vaccinations.Separately, the ONS published data on trade showing the UK’s trade deficit widened to a record high of £16.2bn in January, as imports from the EU surged while exports to the bloc fell by £3bn. This was partly due to changes in the way trade flows between the UK and EU are measured, which accounted for two-thirds of the drop in exports, the ONS said. But Tombs noted that, after adjusting for inflation, UK goods exports were a “whopping” 19 per cent below their average level in 2018, a stark contrast to the double-digit growth in goods exports from advanced economies — underlining the degree to which UK exporters had lost market share. More

(Reuters) – Russian Prime Minister Mikhail Mishustin on Friday said companies under Western sanctions would have the right to withhold publishing the names of parties they work with, as Moscow looks to minimise the impact on its economy. Mishustin said the government was actively working on a third package of measures to counteract sanctions, which would seek to support small and medium sized enterprises, as well as systemically important firms. More

(Reuters) – Gold eased on Friday, consolidating at the end of a volatile week as investors sized up potential rate hikes from the U.S. Federal Reserve, but analysts warned an escalation in Ukraine could spur further safe-haven demand. Spot gold was down 0.3% at $1,991.20 per ounce by 1050 GMT, but remained poised for a weekly rise of about 1.2%. U.S. gold futures were down 0.1% at $1,997.70.Gold is now consolidating, with the likelihood of interest rate hikes from the U.S. Federal Reserve adding some pressure while investors awaited additional developments surrounding Ukraine, said Brian Lan, managing director at dealer GoldSilver Central.U.S. inflation ballooned in February, data showed on Thursday, locking in expectations for an interest rates hike next week, which would in turn translate into increased opportunity cost of holding non-yielding bullion. While firm yields are for now dragging on gold, which is pausing for breath, an escalation in Ukraine would throw technical factors “out of the window,” said Michael Hewson, chief market analyst at CMC Markets UK. [US/] Investors rushed to safe-haven assets as the Ukraine crisis snowballed, boosting gold prices on Tuesday to near their record levels hit in August 2020, but the rally has since decelerated.In gold, palladium and across markets, investors are struggling to price anything fairly, given the headline risk, Hewson said, adding, “anyone who says they can tell you where gold or anything will be in a week’s time is being economical with the facts.” Spot palladium rose 0.9% to $2,955.62 per ounce. The metal set a record high earlier this week on fears of supply disruption from top-producer Russia, the subject of Western sanctions for its invasion of Ukraine.Silver was down 0.2% at $25.82 per ounce. Platinum was up 0.2% at $1,070.65, but was facing its biggest weekly decline since November. More

WASHINGTON (Reuters) – Philadelphia is plugging a massive budget hole opened by COVID-19, avoiding layoffs and the closing of swimming pools. St. Louis is handing out $500 checks to 10,000 needy families. Denver has set aside $28 million for affordable housing units amid spiraling rental costs. With revenues still crimped by COVID-19, these U.S. cities can fund those initiatives thanks to a $350 billion bucket of coronavirus aid money for state and local governments enacted a year ago Friday.As President Joe Biden’s ambitious social and climate spending plans languish amid congressional resistance and Washington’s shifting focus to the war in Ukraine, the American Rescue Plan’s State and Local Fiscal Recovery Fund is emerging as his administration’s top poverty-fighting tool.Allocated based on population, income and unemployment levels, some 70% of that money is already sitting in municipal treasuries. But many state and local governments are just now starting to spend it.”It’s going to allow us to not have layoffs,” Philadelphia Chief Grants Officer Ashley Del Bianco said. “It will also allow us to continue offering some really key city services. Parks, libraries, recreation centers in large part had major funding cuts.”Philadelphia is devoting its entire $1.4 billion allocation to make up for lost revenue when suburban residents stopped paying the city’s 3.45% wage tax during the pandemic while they worked from home instead of commuting to city offices, Del Bianco said.The funds will add over $250 million a year to the city’s $5.3 billion annual budget over five years. Should revenues recover more quickly, the city will consider other uses, she added.GENERATIONAL WINDFALLMany mayors and county executives have never seen this kind of cash windfall.”This is a sort of once-in-a-generation level of investment in state and local governments,” said Alan Berube, senior fellow with Brookings Metro, an urban policy think tank in Washington. Final rules issued by the Treasury in January expanded allowable uses, including premium pay for public sector workers, childcare, preschool programs and affordable housing projects in pandemic-hit communities.Such needs were meant to be funded in Biden’s $2 trillion “Build Back Better” spending package, which had proposed funding for childcare subsidies, education, job training and tax credits for green energy technologies.Although the plan stalled after objections from Democratic Senator Joe Manchin, the Biden administration is still pushing for key elements, now marketed as “Building a Better America.” But that, too, faces uncertainty as mid-term congressional elections loom and Russia’s invasion of Ukraine diverts attention.MONEY IN HAND In the absence of long-term national social funding programs, “the American Rescue Plan becomes an even more important vehicle for poverty alleviation,” Berube said.Some cities late last year began to use ARP funds to set up cash payment programs for low-income residents, but without longer-term funding, it is unclear how these can be sustained.Deputy Treasury Secretary Wally Adeyemo said he views the money as a complement to Biden’s social investment agenda, not a substitute. “They’re both trying to address a similar set of challenges – a classic underinvestment in our human capital and the infrastructure that makes our communities run,” Adeyemo told Reuters in an interview.The ARP funding bridges a gap during COVID-19, but the administration will “try to make longer-term investments that would deal with this challenge over time,” he said.NEW RULES, NEW SPENDINGMany local governments, particularly in smaller communities, had held off on committing funds due to lack of clarity on allowable spending and to see what they might get from Biden’s $1.2 trillion infrastructure package and the social spending bill, said Vicki Vogel Hellenbrand, public sector practice leader at consulting group Baker Tilly.”Based on our client base, unless they were going to spend the money on a pretty clear water project, people were waiting a little bit to see the final rules,” Hellenbrand said.She said the new rules ease documentation burdens on smaller towns by granting them an automatic “allowance” of up to $10 million – often more than their entire allocation – that can be used for revenue replacement.In Bethlehem, Pennsylvania, small businesses from barbershops to childcare providers are receiving ARP-funded grants from Northampton County.Michelle Thorpe, owner of Above and Beyond Learning Center, said she put her $10,000 grant towards buying a van for trips to parks and libraries. She plans to start looking for a larger space later this year.”I want to grow because there’s only 19 kids here. I have plans and I have dreams,” she said. More

How well did you keep up with the news this week? Take our quiz.Russia has launched air strikes on previously untouched Ukrainian cities in a sign President Vladimir Putin is widening the scope of his military operation as the war enters its third week.Russian jets hit the central Ukrainian city of Dnipro earlier today while rockets pounded military airfields in Lutsk and Ivano-Frankivsk in the west of the country, putting them “out of action”, according to the Russian ministry of defence.Meanwhile, western intelligence officials said they believed a 40-mile column of Russian armoured vehicles and military hardware north of Kyiv had split into two as the Kremlin prepares for an assault on the capital.As Russian forces intensified their campaign, Putin ordered the deployment of thousands of “volunteers”. Sergei Shoigu, Russia’s defence minister, told the Russian president at a meeting of the national security council that 16,000 fighters from the Middle East were prepared to go into combat on behalf of the separatist-held territories in eastern Ukraine.In the UK, a government minister warned Putin not to “cross the line” and use chemical weapons in the war as he tries to overcome the slow start to his military campaign. In recent days Russia has repeated claims over chemical and biological weapons, raising fears in the west that Putin is preparing to deploy unconventional weapons.Russia has requested a meeting of the UN Security Council later today to discuss allegations that the US has funded unconventional weapons research in Ukraine. The White House said the claims were “preposterous” and believes Moscow is using them to possibly justify its own use of chemical weapons.Follow our live blog for the latest news from Ukraine and our updated maps for a visual guide to the conflict.More on UkraineExplainer: Russia’s failure to win its war swiftly opens up a range of possible outcomes. Could Ukraine neutrality offer a way out?In Russia: The country’s anti-Putin minority is disappearing behind a new iron curtain that could cut them off forever. Here’s more on Putin’s inner circle.Banks and businesses: Putin is seeking “legal solutions” to seize assets of companies exiting Russia. Meanwhile, Goldman Sachs and JPMorgan yesterday joined Wall Street’s exodus from Russia.Ukraine’s economy: More than half of Ukraine’s economy has shut down and infrastructure assets worth $100bn have been destroyed, President Volodymyr Zelensky’s economic adviser said yesterday.Technology: China’s internet companies and technology platforms have become propaganda tools in Putin’s war.Opinion: Tackling the Kremlin’s money in “Londongrad” will be a long-term campaign, writes our editorial board.Five more stories in the news1. EU and UK open antitrust probe into Google and Meta Antitrust regulators in the UK and EU have formally opened an investigation into an agreement between the two internet companies known as “Jedi Blue”. The probe follows a similar move by the US Department of Justice which accuses Google and the company formally known as Facebook of colluding in the internet advertising market. 2. China struggles to rein in biggest virus outbreak since Wuhan Changchun, capital of the north-eastern Jilin province with 9mn people and an important manufacturing base, was ordered into lockdown today after 23 new cases were reported. Health authorities in China said daily case numbers had tripled in the past week.3. US inflation hits new 40-year high Consumer price growth approached 8 per cent last month ahead of a surge in energy prices following the Ukraine invasion, raising pressure on the Federal Reserve to tighten monetary policy. Explore our global inflation tracker here.4. ECB scales back stimulus plan The European Central Bank has scaled back its bond-buying stimulus plan in response to inflation being driven up by the war in Ukraine, while giving itself more flexibility on the timing of a potential interest rate rise this year.5. SEC sets clock for delisting Chinese companies over audit demand Five Chinese companies listed in New York have been named by US regulators as the first of as many as 270 groups that will be delisted if they do not hand over detailed audit documents that back their financial statements.The days aheadData The University of Michigan’s preliminary consumer sentiment index is expected to come in at 61.4 in March, from a final reading of 62.8 in February. Mexico‘s statistics agency is expected to report a 0.4 per cent drop in industrial output for January, compared with a rise of 1.2 per cent in December. Elections Left-winger Gabriel Boric, 36, will be sworn in as Chile’s youngest-ever leader today. Turkmenistan will hold early presidential elections tomorrow after incumbent Gurbanguly Berdymukhamedov resigned. On Sunday, Colombians will vote in parliamentary elections and Mali will hold its first round of parliamentary and presidential elections.Worldwide web’s 33rd birthday Sir Tim Berners-Lee is set to publish his annual letter on the state of his invention and his vision for the future.What else we’re reading and watchingWeWork co-founder Adam Neumann on his next steps After a fall as spectacular as his rise, the charismatic salesman is back. This time he plans to found start-ups, fund others and create a new property empire.The great NFT sell-off Internet collectibles ranging from cartoon apes to artsy doodles have plunged in value as real-world conflict and a broader cryptocurrency slump begins to unwind one of the biggest speculative frenzies. Has the digital craze hit its peak?Evergrande: the end of China’s property boom The rapid expansion of the country’s property sector was powered by a great migration from the farms to the cities — and built on cheap credit. The FT tells the story of Evergrande, the most indebted property developer in the world, which now stands on the brink of collapse.

Video: Evergrande: the end of China’s property boom

When do we declare the Covid pandemic over? As the World Health Organization prepares to mark the second anniversary of the coronavirus pandemic, Anjana Ahuja asks when can we declare it over?What is the true value of a tree? Countless organisations and institutions have tree-planting targets. But if what we plant is going to survive for future generations, we need to factor in climate change. Experts say only five or six of the UK’s native species are suited to the warming weather.FilmThis week’s releases include Red Rocket, starring Simon Rex as a washed-up porn star who returns to the city of his youth after a career in Los Angeles. In Midnight, one of the stars of the Netflix sensation Squid Game, Wi Ha-joon, plays a cocksure killer in pursuit of a mother and her daughter, both of whom are deaf, through the darkened streets of Seoul. For something lighter, Netflix and Disney have both chosen this week to launch high profile children’s movies. The Adam Project stars Ryan Reynolds while Turning Red is a gently upbeat tale from Pixar.

Turning Red is the stuff of fable, starring 13-year-old Chinese-Canadian heroine Mei Lee who turns into a giant red panda More

The median inflation expectation for 12 months’ time rose to 4.3% in February’s survey from 3.2% in November, its highest since August 2008. Expectations for two- and five years’ time were the highest since 2013 and 2020 at 3.2% and 3.3%.BoE policymakers closely watch inflation expectations as they view them as a way that temporarily high inflation can become persistent through its effect on companies’ pricing plans or employees’ wage demands, even after the initial drivers of higher prices have faded.However a one-off question asked in February’s survey showed workers expected their pay to rise by just 2.1% over the next 12 months, far below the rate of inflation.British consumer price inflation hit its highest in nearly 30 years in January at 5.5% due to higher energy prices and post-pandemic bottlenecks in supply chains. Many economists think it could exceed 8% this year and reach its highest since the early 1980s due to the further upward impact on oil and gas prices from Russia’s invasion of Ukraine.Other measures of inflation expectations have moved up too. Citi’s monthly survey with polling company YouGov showed the public’s expectations for inflation in five to 10 years’ time rose to 4.1% last month, the joint highest since the series began in 2005, while financial markets price in the highest inflation in more than a decade.The BoE survey took place in two waves of around 2,200 people around Feb. 4-7 and Feb. 18-21. It was conducted by polling company Ipsos, which has replaced Kantar as the survey provider. More

WASHINGTON (Reuters) – The U.S. Senate on Thursday approved legislation providing $1.5 trillion to fund the federal government through Sept. 30 and to allocate $13.6 billion to aid Ukraine.The 2,700-page bill passed in a bipartisan 68-31 vote, one day after the House of Representatives approved the package.President Joe Biden is expected to sign the bill into law, averting agency shutdowns ahead of the midnight Friday deadline when existing U.S. government funds expire.”We’re keeping our promises to support Ukraine as they fight for their lives against the evil Vladimir Putin,” Senate Majority Leader Chuck Schumer said, referring to Russia’s president who has orchestrated a massive attack against its neighbor.The aid for Ukraine is designed to finance ammunition and other military supplies, as well as humanitarian support.The legislation’s passage follows months of negotiations over the federal government’s funding and therefore policy priorities. It also comes as lawmakers jostle to show support of Ukraine in its battle against Russian forces, with Democrats and Republicans saying the Biden administration must do more to help Kyiv.On Wednesday, House Speaker Nancy Pelosi told reporters that this Ukraine aid package likely would be followed by additional measures to help Kyiv battle Russia and rebuild from the destruction brought by Moscow’s attacks.On Thursday, ahead of the vote, Republican senators called for the Biden administration to send Ukraine the fighter jets the country’s President Volodymyr Zelenskiy had requested. The Biden administration has argued that providing combat aircraft, even if they were being supplied by Poland, would dangerously escalate the conflict.The House also approved a bill that banned imports of Russian oil and called for reviewing Russia’s participation in some international trade programs, including the World Trade Organization. That measure’s fate in the Senate was unclear. Biden is expected to call on Friday for an end of normal trade relations with Russia.Besides providing money for ammunition and other military supplies and humanitarian aid for Ukrainians, the legislation funds regular U.S. military programs and an array of non-defense operations through Sept. 30, including money for infrastructure projects authorized by an earlier bipartisan package.Senator Richard Shelby, the senior Republican on the Senate Appropriations Committee, applauded the spending bill for increasing defense spending by nearly $42 billion over last year to total $782 billion.Without passage of this legislation by midnight Friday, federal agencies would have had to begin laying off workers and suspending government programs deemed non-essential.The Senate also passed a stop-gap bill extending existing federal funding through Tuesday so that congressional clerks have the time they need to process the sprawling “omnibus” legislation — a chore that could go beyond Friday’s midnight deadline. That ensures no interruption in government services before Biden receives the omnibus bill from Congress for signing into law. More