Finance

Gold has always held an allure. The earliest civilisations used it for jewellery; the first forms of money were forged from it. For centuries kings clamoured to get their hands on the stuff. Charlemagne conquered much of Europe after plundering vast amounts of gold from the Avars. When King Ferdinand of Spain sent explorers to the new world in 1511, he told them to “get gold, humanely if you can, but all hazards, get gold.” Ordinary men also clamoured for it after James Marshall, a labourer, found a flake of gold while constructing a saw mill in Sacramento, California, in 1848.People are once again spending big on the precious metal. On April 9th its spot price hit a record of $2,364 an ounce, having risen by 15% since the start of March. That gold is surging makes a certain degree of sense: the metal is seen to be a hedge against calamity and economic hardship. It tends to rally when countries are at war, economies are uncertain and inflation is rampant.But only a certain degree. After all, why is it surging precisely now? Inflation was worse a year ago. The Ukraine war has arrived at something of a stalemate. In the month after Hamas’s attack on Israel on October 7th, the price of gold rose by just 7%—half the size of its more recent rally. Moreover, investors had only recently appeared to have gone off the stuff. Those who thought gold would act as a hedge against inflation were proven sorely wrong in 2022 when prices slipped even as inflation spiralled out of control. Cryptocurrencies like bitcoin—often viewed as a substitute for gold—have gained popularity. Longtime gold analysts are puzzled by its ascent.An investor who cannot understand a rally on the basis of fundamentals must often consider a simpler rationale: there have been more eager buyers than sellers. So, who is buying gold in bulk?Whoever it is, they are not using exchange-traded funds, or etfs, the tool most often used by regular folk through their brokerage accounts, as well as by some institutional investors. There have, in fact, been net outflows from gold etfs for more than a year. After tracking each other closely throughout 2020 and 2021, gold prices and etf inflows decoupled at the end of 2022. Although prices are up by around 50% since late 2022, gold held by etfs has dropped by a fifth.That leaves three buyers. The first, and biggest, are central banks. In general, central bankers have been increasing the share of reserves that are stored in gold—part of an effort to diversify away from dollars, a move that gathered pace after America froze Russia’s foreign-exchange reserves in response to its invasion of Ukraine. Nowhere is this shift clearer than in China, which has raised the share of its reserves held in gold from 3.3% at the end of 2021 to 4.3%. Trading has picked up in the so-called over-the-counter market, in which central banks buy much of their gold. China’s central bank added 160,000 ounces of gold, worth $384m, in March.The second is big institutions, such as pension or mutual funds, which may have been making speculative bets or hedges on gold—in case inflation does come back or as protection against future calamities. Activity in options and futures markets, where they tend to do most of their trading, is elevated.The third potential buyer is the most intriguing: perhaps private individuals or companies are buying physical gold. In August it became possible to buy hunks of the metal at Costco, an American superstore beloved by the cost-conscious middle classes for selling jumbo-size packs of toilet paper, fluffy athletic socks and rotisserie chickens, all at super-low prices. The retailer started selling single-ounce bars of gold, mostly online, for around $2,000—just a hair higher than the spot value of bullion at the time. It sold out almost immediately, and continues to do so whenever it restocks. Analysts at Wells Fargo, a bank, estimate that shoppers are buying $100m-200m worth of gold each month from the superstore, alongside their sheet cakes and detergent.That would be 40,000 to 80,000 ounces of gold each month; or, in other words, up to half as much as the Chinese central bank. Such behaviour is perhaps a harbinger of a trend. Inflation in America is creeping up again. It has overshot expectations for three consecutive months, and would reach 4% in 2024 if current trends were to continue. Medium-term expectations, which had dropped, have begun climbing. As shoppers peruse Costco’s wares, worrying about the cost of living, it is it any wonder they are tempted by a bit of bullion?■Read more from Buttonwood, our columnist on financial markets: How to build a global currency (Apr 4th)How the “Magnificent Seven” misleads (Mar 27th)How to trade an election (Mar 21st)Also: How the Buttonwood column got its name More

Optimism about India tends to spike now and again. In 1996, a few years after the country opened to foreign capital, the price of property in Mumbai, India’s financial hub, soared to the highest of any global city, according to one account. In 2007 the country’s economy grew at an annual rate of 9%, leading many to speculate that it might hit double digits. Yet after each of these booms, hopes were dashed. The late-2000s surge made way for financial turbulence in the 2010s.Today India again appears to be at the start of an upswing. In the year to the fourth quarter of 2023, GDP growth roared at 8.4%. But such figures tend to be treated with a pinch of salt. Economists inside and outside the government are debating just how fast the economy is growing—a question that has particular piquancy ahead of a general election that begins on April 19th. So what is India’s actual growth rate? And is the economy accelerating?Chart: The EconomistTo answer these questions, start with the 8.4% figure. Nominal GDP growth in the same period was 10.1%, implying that inflation was only 1.7%. Although that may seem suspect, given that India’s consumer prices rose by 5.4% over the year, it can be explained. Like many other countries, India’s GDP deflator puts a lot of weight on wholesale producer prices. These are volatile and grew by only 0.3% over the year.India’s approach does have oddities, however. In 2015 the country changed its GDP calculation, starting with figures from 2011, from one that measured real GDP directly by observing changes in production quantities to one that measured nominal GDP through surveys and financial reports, before then deflating them to obtain real GDP. It is a complex process: some sectors, such as manufacturing and mining, are deflated using a wholesale price index (WPI); services use a mix of the WPI and consumer prices; other sectors, including construction, use a quantity-based method.In 2017 Arvind Subramanian, then India’s chief economic adviser, observed that the country’s GDP figures were falling out of line with indicators such as credit, electricity use and freight traffic. In 2019 he published a paper suggesting India’s GDP growth in 2011-16 had been overestimated by a few percentage points a year. The numbers have since been mired in controversy, not least because the methodological change came with a revision to historical data that reduced the growth rates achieved by the previous government.Few people suspect foul play in India’s GDP calculations. The old approach struggled to capture changes in the quality of goods, rather than quantities, says Pronab Sen, India’s first chief statistician. But the new method has disadvantages of its own. “Earlier, the chances were we were measuring real GDP growth more accurately, and today we are measuring nominal GDP more accurately,” says Mr Sen.The disadvantages reflect two issues: the choice of deflator, and how the deflation is carried out. More sectors use WPI as their deflator than consumer prices. Indeed, even though WPI does not contain service prices, it is still used for a number of industries, such as hotels, that ought to incorporate them. This is a growing problem. Service sectors already make up more than half India’s GDP and are expanding faster than the rest of the economy. By our calculations, India’s consumer price index, which puts greater weight on services, grew by 20 percentage points more than its GDP deflator from 2011 to 2019—the largest gap in any big economy. From 2003 to 2011, by contrast, it grew by three percentage points less.Then there is how deflation is done. Most countries use a method called “double deflation”, where input and output prices are deflated separately. Consider a manufacturer importing oil for use in production. If oil prices fall, output prices do not and quantities stay the same, real value added should not change. But if the same deflator is used for inputs and outputs, as in India, it would look as if the manufacturer had become more productive.This is what seems to have happened during the 2010s. Oil prices were steady at $90-100 a barrel from 2011 to 2014, before crashing to below $50 over the next two years. India is reliant on oil imports, as the world’s third-biggest consumer of oil, 85% of which is brought in. Although India’s manufacturing sector struggled in this period, GDP data concealed its difficulties.The good news is that since the covid-19 pandemic, the divergence between WPI and consumer prices no longer appears as significant. From December 2011 to 2019, consumer prices grew at a 5.8% annual rate and WPI grew at a 2.6% annual rate. Yet in the four years to December 2023, both measures have grown at around 5.7%. WPI remains volatile, which is why quarterly GDP figures, such as the recent 8.4% growth rate, should be treated with a degree of caution. The number was also boosted by a one-time reduction in subsidy payments and an increase in indirect tax collections, which is why the trend is more likely to be closer to 6.5%—the growth rate of gross value added.India’s government is working towards incorporating services into its price indices. The road to a fully fledged producer-price index and double-deflation will be a long one, however. Mr Sen says many Indian companies would rather not share data on their costs with the government. Statisticians are often reluctant to force the private sector to comply. Meanwhile, collecting wholesale prices is much easier because traders are happy to report them.Do existing data suggest a boom? Since December 2019, real GDP has grown by 4.2% at an average annual rate, meaning that India, like many other countries, has not recovered to its pre-pandemic trend. Corporate and foreign investment remain weak. But looked at since December 2021, India’s overall economy seems robust, having grown at 7.1% annually. Alternative indicators, from electricity use to freight traffic, are strong; surveys of purchasing managers for both manufacturing and services have hit their highest levels in over a decade. Forecasters expect 6.5% annual growth over the next five years. Although real GDP growth from 2011 to 2019 was also officially 6.5% a year, the underlying rate was probably lower, implying genuine acceleration may be under way. The data is noisy, the picture is mixed and yet most government economists would be satisfied with that outcome. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter.Stay on top of our India coverage by signing up to Essential India, our free weekly newsletter. More

Selling more oil at higher prices ought to be the stuff of dreams for a petrostate. But for Russia it is a sign of a new, punishing phase in its war with Ukraine. Months of Ukrainian drone strikes on refineries have crimped Russia’s ability to produce refined fuels, such as diesel and petrol, and turned the world’s third-largest oil producer into an importer of petrol. Energy firms have tried to pare their losses by selling unrefined oil overseas, pushing exports to a ten-month high in March.In Ukraine’s most recent attack on April 2nd, its planners extended their reach. They managed to land explosives on a refinery 1,115km from the border. Their attack set fire to a unit responsible for 3% of Russia’s refining capacity. Although it left no lasting damage, others have been more successful. All told, Ukraine’s barrage has knocked out a seventh of Russian refining capacity, according to S&P Global, a data firm. Maintenance work and flooding in the city of Orsk on April 8th has taken more capacity offline. Wholesale prices on the St Petersburg International Mercantile Exchange have spiked. Ukraine, which has itself been the target of strikes on energy infrastructure, hopes the assaults will slow the flow of dollars into its enemy’s war machine and dent support for the war.Russia’s oil giants are suffering the most. Refineries that normally produce petrol and diesel for overseas clients at a premium have been diverted to domestic production. The volume of diesel due to pass out of Russian ports has hit a five-month low. At the same time, oil barons are seeking new customers for their excess crude, on which they will stomach losses of $15 or so for every barrel that could have been exported as a refined product, says Sergey Vakulenko, a former oil executive.Although Ukraine’s attacks have slowed since Vladimir Putin’s re-election in March, Ukraine has given no indication that they will stop. It can lob drones faster and more cheaply than Russia can repair its refineries. Some facilities, like the NORSI refinery in the city of Nizhny Novgorod, have been particularly slow and expensive to fix, in part because access to equipment is stymied by Western sanctions. As of this month, Russian oil producers must also reduce the amount they pump from the ground by about 5% as part of a production cap agreed with OPEC+, an oil cartel.Motorists have so far been shielded from Ukraine-inflicted “unplanned maintenance” (as Russia’s energy ministry puts it). The government has kept a lid on prices by banning petrol exports for six months from March 1st, and striking a deal with Belarus, its client state. Russia imported 3,000 tonnes of fuel from Belarus in the first half of March, up from zero in January. Fearing that may not be enough, officials have also asked neighbouring Kazakhstan to set aside a third of its reserves, equivalent to 100,000 tonnes, should Russia need them, according to Reuters. If attacks continue, they could start to push up prices.The consequences for Russia’s public finances should be limited, even though oil revenues represent 34% of its budget. Rosneft, the state oil company, will dispense a smaller dividend if it cannot make up its lost revenues, but many doubt these dividends make it to state coffers at all. The government will even save some cash by paying out fewer per-barrel subsidies to refineries. Russia’s biggest money-earners are resource taxes. And because these are levied as royalties at the well-head, the government is indifferent between oil exported as crude or as refined fuel, says Mr Vakulenko. As long as Russia is able to export crude, it can collect royalties.Observers outside Russia are watching to see if Ukraine’s attacks will affect the global oil market. They have yet to have much impact, but the price of Brent crude has risen by 19% this year to just under $90 a barrel, owing to OPEC+ supply curbs, better-than-expected global economic conditions and disruptions in the Red Sea. Few observers have more at stake than Joe Biden, who faces an election in November. His administration has urged Ukraine to halt its attacks, fearing they will provoke tough retaliation from Russia and drive petrol prices higher. Ukraine’s leaders are willing to take the risk. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

At an upmarket housing development in Wuhan, sales agents want to make clear that their state-owned firm has severed all its ties to the private sector. The firm had at first partnered with Sunac, a private developer, until it defaulted in 2022. A saleswoman explains that the firm’s owner also controls the city’s waterworks and electricity provider. If this type of firm collapses, she says with a grin, “then the whole country has no hope”.More than three years into China’s property crisis, the biggest private builders are folding under the strain of enormous debts. New-home sales in 30 large cities fell by 47% in March, year on year. Revenues for the 100 biggest developers were down 46% in the same month. Housing investment dropped to 8.4trn yuan ($1.2trn), a quarter below its peak in 2021. Although millions of families are waiting for developers to finish building their flats, it would take 3.6 years to sell China’s glut of inventory, including homes still under construction, reckon analysts at ANZ, a bank.All this presents an opportunity for state-owned firms. Only by securing access to funding can developers survive. Some private companies have found help via a government programme that approves housing projects for state funding, but it has been slow to deploy capital. State firms, on the other hand, have long enjoyed tight links with banks. This means they are buying more land, building more homes and selling more of them than their private counterparts. At a time when most private companies face some form of restructuring, a few state-owned firms are miraculously eking out profits. Moreover, their actions provide hints as to the plans of Xi Jinping, China’s leader, for the next decade of the country’s property industry.Chart: The EconomistAs part of those plans, the state is set to become China’s biggest home-builder. The country’s leaders want to construct millions of “social housing” units for low-income households, which cannot be resold like normal commercial units. Such is the scale of the planned construction, social homes will come to dominate overall housing supply by 2030. As much as 4trn yuan will be spent on social housing and other state building this year and next, estimates S&P Global, a credit-rating agency. According to Capital Economics, a research firm, just as construction by developers began to plummet year on year in late 2021, building by other types of companies, mainly local-government firms, soared (see chart). As a result, 30-40% of new housing supply will be social homes by next year, up from just 10% currently.Local governments may also become the largest buyers of the country’s housing stock. The city of Zhengzhou recently announced that it would purchase 10,000 homes to make them social units. Many will be rented out. Although there is no estimate of how big a landlord local governments will become, several other cities have announced similar plans.A few powerful state-owned firms are on the rise. CR Land, owned by the central government, notched a 3% year-on-year increase in its core profits—an astonishing accomplishment when most of its peers have lost money or collapsed. COLI, another centrally controlled giant, saw profits fall by a very respectable 3%. As the crisis has played out, home sales by the largest state firms fell by only 25% between mid-2021 and mid-2023, while those at the largest private ones tumbled 90%.This reflects official preferences. On April 8th a state bank called for the liquidation of Shimao, a private developer that defaulted in 2022, over a $200m unpaid loan. Needless to say, this would hinder Shimao’s attempts to restructure its debts and continue building unfinished homes. By contrast, in March regulators asked banks and bondholders to help save Vanke, a developer with a powerful state-backed shareholder. Chinese policymakers are much happier to offer bail-outs to institutions over which they have influence.With the state set to consume China’s property industry, what could go wrong? For a start, state firms face dangerous debts. Local-government firms sit on estimated collective debt of 75trn yuan, or about 60% of GDP. When such firms buy land from local governments they merely shift money from one pocket to another. These transactions have kept money flowing into local coffers, but are building up unsustainable burdens. Some local-government firms have started to issue bonds for the sole purpose of paying off other companies’ debts. Analysts fear that this level of spending cannot continue much longer, especially in poorer provinces.Additional debts might appear to policymakers to be a price worth paying for control over China’s most important asset. The future of the housing market, the thinking goes, would include fewer boom-and-bust cycles if sober state firms were in charge. Cheaper accommodation should also help Mr Xi fight China’s widening wealth gap. Yet state dominance will also mean a less efficient market. China’s private homebuilders are masters of supply chains. Their ability to organise labour for construction is unparalleled. The state, in contrast, is a lousy builder. As state firms take on a bigger and bigger role, the quality of new homes is likely to fall.The intervention will also shake the foundations of the market. Homebuyers will probably become reluctant to buy a home at commercial rates when the same unit may later be available at subsidised ones. Market-watchers suspect officials want to conserve funds to buy up homes on the cheap, taking advantage of the struggles of private firms. As a consequence, the rapid growth of social housing will probably cause an even deeper crisis among private companies. That may not be quite what Mr Xi has in mind. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

In a 209-page plan published Wednesday, the Swiss government proposed 22 measures aimed at tightening its policing of banks deemed “too big to fail,” a year after authorities were forced to broker the emergency rescue of Credit Suisse by UBS.
The UBS balance sheet of around $1.7 trillion is now double Switzerland’s annual GDP, prompting enhanced scrutiny of the protections around the Swiss banking sector and the broader economy.

Sergio Ermotti, CEO of Swiss banking giant UBS, during the group’s annual shareholders meeting in Zurich on May 2, 2013. 
Fabrice Coffrini | Afp | Getty Images

Switzerland’s tough new banking regulations create a “lose-lose situation” for UBS and may limit its potential to challenge Wall Street giants, according to Beat Wittmann, partner at Zurich-based Porta Advisors.
In a 209-page plan published Wednesday, the Swiss government proposed 22 measures aimed at tightening its policing of banks deemed “too big to fail,” a year after authorities were forced to broker the emergency rescue of Credit Suisse by UBS.

The government-backed takeover was the biggest merger of two systemically important banks since the Global Financial Crisis.
At $1.7 trillion, the UBS balance sheet is now double the country’s annual GDP, prompting enhanced scrutiny of the protections surrounding the Swiss banking sector and the broader economy in the wake of the Credit Suisse collapse.

Speaking to CNBC’s “Squawk Box Europe” on Thursday, Wittmann said that the fall of Credit Suisse was “an entirely self-inflicted and predictable failure of government policy, central bank, regulator, and above all [of the] finance minister.”
“Then of course Credit Suisse had a failed, unsustainable business model and an incompetent leadership, and it was all indicated by an ever-falling share price and by the credit spreads throughout [20]22, [which was] completely ignored because there is no institutionalized know-how at the policymaker levels, really, to watch capital markets, which is essential in the case of the banking sector,” he added.
The Wednesday report floated giving additional powers to the Swiss Financial Market Supervisory Authority, applying capital surcharges and fortifying the financial position of subsidiaries — but stopped short of recommending a “blanket increase” in capital requirements.

Wittman suggested the report does nothing to assuage concerns about the ability of politicians and regulators to oversee banks while ensuring their global competitiveness, saying it “creates a lose-lose situation for Switzerland as a financial center and for UBS not to be able to develop its potential.”
He argued that regulatory reform should be prioritized over tightening the screws on the country’s largest banks, if UBS is to capitalize on its newfound scale and finally challenge the likes of Goldman Sachs, JPMorgan, Citigroup and Morgan Stanley — which have similarly sized balance sheets, but trade at s much higher valuation.
“It comes down to the regulatory level playing field. It’s about competences of course and then about the incentives and the regulatory framework, and the regulatory framework like capital requirements is a global level exercise,” Wittmann said.

“It cannot be that Switzerland or any other jurisdiction is imposing very, very different rules and levels there — that doesn’t make any sense, then you cannot really compete.”
In order for UBS to optimize its potential, Wittmann argued that the Swiss regulatory regime should come into line with that in Frankfurt, London and New York, but said that the Wednesday report showed “no will to engage in any relevant reforms” that would protect the Swiss economy and taxpayers, but enable UBS to “catch up to global players and U.S. valuations.”
“The track record of the policymakers in Switzerland is that we had three global systemically relevant banks, and we have now one left, and these cases were the direct result of insufficient regulation and the enforcement of the regulation,” he said.
“FINMA had all the legal backdrop, the instruments in place to address the situation but they didn’t apply it — that’s the point — and now we talk about fines, and that sounds like pennywise and pound foolish to me.” More

The capital city of Beijing saw rents for prime retail locations in the first quarter rise at their fastest pace since 2019, according to property consultancy JLL.
The firm expects the demand to persist throughout the year, helping boost rents, which remain well below pre-pandemic levels.
Prices in China’s commercial real estate market are getting close to an attractive buying point, Joe Kwan, Singapore-based managing partner at Raffles Family Office, said in an interview last week.

Illuminated skyscrapers stand at the central business district at sunset on November 13, 2023 in Beijing, China.
Vcg | Visual China Group | Getty Images

BEIJING — China’s commercial property sector is seeing pockets of demand amid an overall real estate slump.
The capital city of Beijing is seeing rents for prime retail locations rise at their fastest pace since 2019, property consultancy JLL said in a report Tuesday. Rents increased by 1.3% during the first three months of this year compared with the fourth quarter of 2023, the report said.

Demand from new food and beverage brands, niche foreign fashion offerings and electric car companies has helped drive the interest in shopping mall storefronts, according to JLL.
The firm expects the demand to persist throughout the year, helping boost rents, which remain well below pre-pandemic levels.
Commercial real estate, which includes office buildings and shopping malls, makes up just a fraction of China’s overall property market.

Sales of offices and commercial-use properties rose 15% and 17%, respectively, by floor area, in January and February from a year earlier, according to Wind Information.
In contrast, floor space of residential properties sold dropped by nearly 25% during that time, the data showed. Sales for both commercial and residential properties had fallen for much of last year, according to Wind.

Covid-19 restrictions on movement had also cut demand for China’s commercial property, in line with global trends. China’s economy, however, took longer than expected to rebound from the pandemic, amid a broader slump in the property market.

Getting cheap enough to buy

China’s commercial real estate prices are nearing an attractive buying point, Joe Kwan, Singapore-based managing partner at Raffles Family Office, said in an interview last week.
“We do have an internal timeline or projection of how far valuation has to fall before it makes it attractive for us,” he said. “I think the opportunity is about to open up for us right now.”
Kwan said he expects to start making deals in the second half of this year, through next year. The firm is primarily looking at commercial properties in Shanghai and Beijing.
Such bargain-hunting is not necessarily a sign that the market is on its way to a full recovery.
“What we have been observing is that owners [have] been throwing us the same opportunities, some of the same portfolios, but at a much discounted price on a quarterly basis,” he said. “So from that it gives us the general sense that it’s still going to be some way down the road before we can see the bottoming.”
“We do have still a very positive outlook on the longer term a prospect of China, given its size of population, given its demographics, given its consumption numbers,” Kwan said. “I think that right now it is going through a territory whereby it may overcorrect and people might miss out on the opportunity to acquire some really, really well-located, good-quality assets that will prove to be a winner, maybe not in the next two to three years, but at least in the mid-term.”
Hong Kong-based Swire Properties said in its report last month that it intends to double its gross floor area in mainland China by 2032. The company currently operates high-end shopping complexes branded “Taikoo Li” in Beijing, Shanghai and other major cities in China.
“In the Chinese Mainland, foot traffic has improved significantly and retail sales have exceeded pre-pandemic levels for most of our malls since pandemic-related restrictions were lifted. Our office portfolio has proven to be resilient despite a weak office market,” Tim Blackburn, Swire’s chief executive, said in the report.
Looking ahead, the company expects 2024 will be a “year of stabilization” in retail demand. More

Perhaps it was always too good to be true. The big economic story of 2023 was the seemingly painless disinflation in America, with consumer price pressures receding even as growth remained resilient, which underpinned surging stock prices. Alas, the story thus far in 2024 is not quite so cheerful. Growth has remained robust but, partly as a result, inflation is looking stickier. The Federal Reserve faces a dilemma about whether to start cutting interest rates; investors must grapple with the reality that monetary policy will almost certainly remain tighter for longer than they had anticipated a few months ago.Chart: The EconomistThe latest troublesome data came from higher-than-expected inflation for March, which was released on April 10th. Analysts had thought that the core consumer price index (CPI), which strips out food and energy costs, would rise by 0.3% month on month. Instead, it rose by 0.4%. Although that may not sound like much of an overshoot, it was the third straight month of CPI readings exceeding forecasts. If continued, the current pace would entrench inflation at over 4% year on year, double the Fed’s target—based on a slightly different inflation gauge—of 2% (see chart 1).Back in December, at the peak of optimism, most investors had priced in six or seven rate cuts this year. They have since dialled back those expectations. Within minutes of the latest inflation figures, market pricing shifted to implying just one or two cuts this year—a dramatic change (see chart 2). It is now possible that the Fed may not cut rates before the presidential election in November, which would be a blow to the incumbent, Joe Biden.Jerome Powell, the Fed’s chairman, has remained consistent. He has always insisted that the central bank will take a data-dependent approach to setting monetary policy. But rather than bouncing up and down in reaction to fresh figures, he has also counselled patience. At the start of this year, even after six straight months of largely benign price movements, he said the Fed wanted more confidence that inflation was going lower before starting to cut rates. Such caution risked seeming excessive. Today it looks utterly appropriate.The volatility of market pricing has also changed the Fed’s positioning relative to the market. At the end of last year, when investors foresaw as many as seven rate cuts this year, officials had pencilled in just three, appearing hawkish. In their more recent projections, published less than a month ago, officials still pencilled in three cuts, which now appears doveish. The Fed will next update its projections in June.In the meantime the Fed will be watching more than the CPI. Its preferred measure for inflation, the core personal consumption expenditures price index (PCE), will be released in a few weeks, and is expected to come closer to 0.3% month on month in March. Several of the items that drove up CPI, particularly motor-vehicle insurance and medical services, are defined differently in PCE calculations. The Fed may also be comforted by data showing wage growth has continued to moderate.Nevertheless, trying to explain away uncomfortable numbers by pointing to this or that data quirk is redolent of 2021, when inflation denialists thought that fast-rising prices were merely a transitory phenomenon. The general conclusion today is that although growth has remained impressively strong, it now appears to be bumping up against the economy’s supply limits, and is therefore translating into persistent inflationary pressure. That calls for tight, not loose, monetary policy. The Fed, already cautious about cutting rates when inflation figures were more co-operative, is likely to be even more wary now. ■ More

Markets are buzzing about an even more specific prices gauge contained within the data — the so-called supercore inflation reading.
The gauge measures services inflation excluding food, energy and housing and has been roaring higher lately, up 4.8% year over year in March and more than 8% at a 3-month annualized pace.
The picture is more complicated because some of the most stubborn components of services inflation are household necessities like car and housing insurance as well as property taxes.

US Federal Reserve Chair Jerome Powell attends a “Fed Listens” event in Washington, DC, on October 4, 2019.
Eric Baradat | AFP | Getty Images

A hotter-than-expected consumer price index reading rattled markets Wednesday, but markets are buzzing about an even more specific prices gauge contained within the data — the so-called supercore inflation reading.
Along with the overall inflation measure, economists also look at the core CPI, which excludes volatile food and energy prices, to find the true trend. The supercore gauge, which also excludes shelter and rent costs from its services reading, takes it even a step further. Fed officials say it is useful in the current climate as they see elevated housing inflation as a temporary problem and not as good a gauge of underlying prices.

Supercore accelerated to a 4.8% pace year over year in March, the highest in 11 months.
Tom Fitzpatrick, managing director of global market insights at R.J. O’Brien & Associates, said if you take the readings of the last three months and annualize them, you’re looking at a supercore inflation rate of more than 8%, far from the Federal Reserve’s 2% goal.
“As we sit here today, I think they’re probably pulling their hair out,” Fitzpatrick said.

An ongoing problem

CPI increased 3.5% year over year last month, above the Dow Jones estimate that called for 3.4%. The data pressured equities and sent Treasury yields higher on Wednesday, and pushed futures market traders to extend out expectations for the central bank’s first rate cut to September from June, according to the CME Group’s FedWatch tool.
“At the end of the day, they don’t really care as long as they get to 2%, but the reality is you’re not going to get to a sustained 2% if you don’t get a key cooling in services prices, [and] at this point we’re not seeing it,” said Stephen Stanley, chief economist at Santander U.S.

Wall Street has been keenly aware of the trend coming from supercore inflation from the beginning of the year. A move higher in the metric from January’s CPI print was enough to hinder the market’s “perception the Fed was winning the battle with inflation [and] this will remain an open question for months to come,” according to BMO Capital Markets head of U.S. rates strategy Ian Lyngen.
Another problem for the Fed, Fitzpatrick says, lies in the differing macroeconomic backdrop of demand-driven inflation and robust stimulus payments that equipped consumers to beef up discretionary spending in 2021 and 2022 while also stoking record inflation levels.
Today, he added, the picture is more complicated because some of the most stubborn components of services inflation are household necessities like car and housing insurance as well as property taxes.
“They are so scared by what happened in 2021 and 2022 that we’re not starting from the same point as we have on other occasions,” Fitzpatrick added. “The problem is, if you look at all of this [together] these are not discretionary spending items, [and] it puts them between a rock and a hard place.”

Sticky inflation problem

Further complicating the backdrop is a dwindling consumer savings rate and higher borrowing costs which make the central bank more likely to keep monetary policy restrictive “until something breaks,” Fitzpatrick said.
The Fed will have a hard time bringing down inflation with more rate hikes because the current drivers are stickier and not as sensitive to tighter monetary policy, he cautioned. Fitzpatrick said the recent upward moves in inflation are more closely analogous to tax increases.
While Stanley opines that the Fed is still far removed from hiking interest rates further, doing so will remain a possibility so long as inflation remains elevated above the 2% target.
“I think by and large inflation will come down and they’ll cut rates later than we thought,” Stanley said. “The question becomes are we looking at something that’s become entrenched here? At some point, I imagine the possibility of rate hikes comes back into focus.”

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