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    The world’s top central bankers see supply chain problems prolonging inflation.

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    The world’s top central bankers acknowledged that inflation, which has spiked higher across many advanced economies this year, could remain elevated for some time — and that though they still expect it to fade as pandemic-related supply disruptions calm, they are carefully watching to make sure that hot price pressures do not become more permanent.Jerome H. Powell, the Federal Reserve chair, spoke Wednesday on a panel alongside Christine Lagarde, president of the European Central Bank; Andrew Bailey, governor of the Bank of England; and Haruhiko Kuroda, head of the Bank of Japan.Mr. Powell noted that while demand was strong in the United States, factory shutdowns and shipping problems were holding back supply, weighing on the economy and pushing inflation above the Fed’s goal of 2 percent on average.“It is frustrating to acknowledge that getting people vaccinated and getting Delta under control, 18 months later, still remains the most important economic policy that we have,” Mr. Powell said. “It is also frustrating to see the bottlenecks and supply chain problems not getting better — in fact, at the margin, apparently getting a little bit worse.”“We see that continuing into next year, probably, and holding inflation up longer than we had thought,” Mr. Powell said.The Fed chair’s comments aligned closely with those of Mr. Bailey and Ms. Lagarde, who also cited uncertainties around persistent supply-chain bottlenecks as a risk.“We’re back from the brink, but not completely out of the woods,” Ms. Lagarde said of the economic rebound. “We still have uncertainty.”She said supply-chain disruptions were accelerating in some sectors, while energy price increases were an area to watch, along with potential new waves of the coronavirus pandemic that might be vaccine-resistant.“Monetary policy can’t solve supply-side shocks,” Mr. Bailey said. “What we have to do is focus on the potential second-round effects from those shortages.”The joint appearance of some of the world’s most powerful economic officials, sponsored by the European Central Bank, came during a turbulent week in financial markets. While stocks were rebounding on Wednesday morning, they had fallen sharply on Tuesday as government bond yields rose. Investors have been shaken by a political standoff over the debt ceiling in the United States, problems in China’s heavily indebted property sector, the reality that global central banks are preparing to dial back economic support and the possibility that recent rapid price gains might last.The burst in inflation has swept Europe and the United States this year as consumer demand booms but factory shutdowns and shipping snarls keep many goods in short supply. Central bankers have consistently argued that those price increases will prove temporary. As businesses adjust to the postpandemic recovery, they say, supply-chain kinks will unravel. And while consumers have been spending down savings stockpiled during the pandemic and padded by government stimulus, those will not last forever.But economic officials have increasingly acknowledged that while they expect the inflationary pop to be temporary, it may last longer than they initially anticipated.In the United States, consumer price inflation came in at 5.3 percent in August, and the Fed’s preferred inflation gauge — the personal consumption expenditures, or P.C.E., index — grew 4.2 percent in the year through July. August P.C.E. data is slated to be released on Friday.Consumer prices are expected to peak “slightly above” 4 percent later this year in Britain, double the central bank’s target.Elsewhere in Europe, inflation is also high, though the jump has not been as large. Euro-area inflation came in at 3 percent in August, the highest reading in roughly a decade. But price gains there are expected to slow more materially over the coming years than in Britain and the United States.Japan is a notable outlier among developed economies, with slow demand and inflation near zero. Weak inflation leaves central banks with less room to help the economy in times of trouble, and can fuel a cycle of economic stagnation, making it a problem.Central bankers in continental Europe, Britain and America have been wrestling with how to respond to the jump in prices. If they overreact to inflation that is temporarily elevated by factors that will soon fade, they could slow labor market recoveries unnecessarily — and may even doom themselves to a future of too-low inflation, much like the situation Japan faces.But if shoppers come to expect consistent inflation amid today’s burst, they may demand higher wages, fueling an upward cycle in prices as businesses try to cover climbing labor costs.Monetary policymakers want to avoid such a situation, which could force them to raise interest rates sharply and spur a serious economic slowdown to tank demand and tame prices.“There’s a tension between our two objectives: maximum employment and price stability,” Mr. Powell said. “Inflation is high, well above target, and yet there appears to be slack in the labor market.”“Managing through that process over the next couple years, I think, is the highest and most important priority, and it’s going to be very challenging,” he added.For now, most top global officials are preaching patience, while moving to gradually reorient their policies away from full-blast economic support. The Fed is preparing a plan to slow its large-scale bond buying, which can keep money pumping through the financial system and lower many types of borrowing costs, even as its policy rate remains at rock bottom. The Bank of England has signaled that policy will need to be tightened soon, and the European Central Bank is slowing its own pandemic-era purchase program.“The historical record is thick with examples of underdoing it,” Mr. Powell said, noting that economic policymakers tend to underestimate economic damage and under-support recoveries. “I think we’ve avoided that this time.” More

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    China Power Outages Close Factories and Threaten Growth

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    High demand and soaring energy prices have forced some factories to shut down, adding further problems for already snarled global supply chains.DONGGUAN, China — Power cuts and even blackouts have slowed or closed factories across China in recent days, adding a new threat to the country’s slowing economy and potentially further snarling global supply chains ahead of the busy Christmas shopping season in the West.The outages have rippled across most of eastern China, where the bulk of the population lives and works. Some building managers have turned off elevators. Some municipal pumping stations have shut down, prompting one town to urge residents to store extra water for the next several months, though it later withdrew the advice.There are several reasons electricity is suddenly in short supply in much of China. More regions of the world are reopening after pandemic-induced lockdowns, greatly increasing demand for China’s electricity-hungry export factories.Export demand for aluminum, one of the most energy-intensive products, has been strong. Demand has also been robust for steel and cement, central to China’s vast construction programs.As electricity demand has risen, it has also pushed up the price of coal to generate that electricity. But Chinese regulators have not let utilities raise rates enough to cover the rising cost of coal. So the utilities have been slow to operate their power plants for more hours.In the city of Dongguan, a major manufacturing hub near Hong Kong, a shoe factory that employs 300 workers rented a generator last week for $10,000 a month to ensure that work could continue. Between the rental costs and the diesel fuel for powering it, electricity is now twice as expensive as when the factory was simply tapping the grid.“This year is the worst year since we opened the factory nearly 20 years ago,” said Jack Tang, the factory’s general manager. Economists predicted that production interruptions at Chinese factories would make it harder for many stores in the West to restock empty shelves and could contribute to inflation in the coming months.Three publicly traded Taiwanese electronics companies, including two suppliers to Apple and one to Tesla, issued statements on Sunday night warning that their factories were among those affected. Apple had no immediate comment, while Tesla did not respond to a request for comment.It is not clear how long the power crunch will last. Experts in China predicted that officials would compensate by steering electricity away from energy-intensive heavy industries like steel, cement and aluminum, and said that might fix the problem.State Grid, the government-run power distributor, said in a statement on Monday that it would guarantee supplies “and resolutely maintain the bottom line of people’s livelihoods, development and safety.”Still, nationwide power shortages have prompted economists to reduce their estimates for China’s growth this year. Nomura, a Japanese financial institution, cut its forecast for economic expansion in the last three months of this year to 3 percent, from 4.4 percent.A power generator at a shoe factory in Dongguan. The rental and fuel costs make electricity from the device twice as expensive as when the factory was simply tapping the grid.Gilles Sabrié for The New York TimesThe electricity shortage is starting to make supply chain problems worse. The sudden restart of the world economy has led to shortages of key components like computer chips and has helped provoke a mix-up in global shipping lines, putting in the wrong places too many containers and the ships that carry them.Power supplies are little different. Compared with last year, electricity demand is growing this year in China at nearly twice its usual annual pace. Swelling orders for the smartphones, appliances, exercise equipment and other manufactured goods that China’s factories churn out has driven the rise.China’s power problems are contributing in some part to higher prices elsewhere, like in Europe. Experts said a surge in prices in China had drawn energy distributors to send ships laden with liquefied natural gas to Chinese ports, leaving others to scurry for further sources.But the bulk of China’s power problems are unique to the country.Two-thirds of China’s electricity comes from burning coal, which Beijing is trying to curb to address climate change. Coal prices have surged along with demand. But because the government keeps electricity prices low, particularly in residential areas, use by homes and businesses has climbed regardless.Faced with losing more money with each additional ton of coal they burn, some power plants have closed for maintenance in recent weeks, saying this was needed for safety reasons. Many other power plants have been operating below full capacity, and have been leery of increasing generation when that would mean losing more money, said Lin Boqiang, dean of the China Institute for Energy Policy Studies at Xiamen University.A workshop producing shoe parts in Dongguan. Prices for the components have already increased 30 to 50 percent from last year.Gilles Sabrié for The New York TimesChina’s main economic planning agency, the National Development and Reform Commission, also ordered 20 large cities and provinces in late August to reduce energy consumption for the rest of the year. The regulators cited a need to make sure that the cities and provinces met full-year targets set by Beijing for their carbon dioxide emissions from the burning of fossil fuels.Besides coal, hydroelectric dams supply much of the rest of China’s power, while wind turbines, solar panels and nuclear power plants play a growing role.China’s difficulty in keeping the lights on and the faucets running poses a challenge for Xi Jinping, the country’s top leader, and the Chinese Communist Party. They have taken a triumphalist stance this year, emphasizing China’s success in quickly eliminating outbreaks of the coronavirus and in winning the release of a senior Huawei executive, Meng Wanzhou, in a dispute with the United States and Canada.But Mr. Xi risks getting tagged for problems as well as successes. He has moved strongly to quell any opposition within the Communist Party and has extended its reach into more sectors of Chinese life. If people in China begin to point fingers, there are few others to blame.China’s economic rebound from the coronavirus has been driven in large part by heavy investment in infrastructure as well as the rise in exports. Overall industrial use consumes 70 percent of the electricity in China, led by the mostly state-owned producers of steel, cement and aluminum.“If those guys produce more, it has a huge impact on electricity demand,” Professor Lin said, adding that China’s economic minders would order those three industrial users to ease back.Disruptions from power shortages have already been felt in Dongguan, at the heart of China’s southern manufacturing belt. Its factories produce everything from electronics and toys to sweaters.The local power transmission authority in Houjie, a township in northwestern Dongguan, issued an order shutting off electricity to many factories from Wednesday through Sunday. On Monday morning, the suspension in industrial electricity service was extended at least through Tuesday night.Air-conditioners outside a worker dormitory in Dongguan. Factories in the city produce everything from electronics to toys to sweaters.Gilles Sabrié for The New York TimesThe throaty roar of huge diesel generators rumbled on Monday morning through the streets and alleys of Houjie, where scores of five-story, concrete-walled factories are nestled among low-rise apartment buildings for migrant workers. Air-conditioners were not running as temperatures climbed into the 90s, and only a few fluorescent lights gleamed in some of the factories’ windows.One of the noisy generators rumbled in a 20-foot yellow shipping container behind a factory where workers in bright blue and orange jumpsuits labored to assemble men’s and women’s leather shoes for American and European buyers.Mr. Tang, the general manager, said his factory had already faced especially strict power usage rules because the government labeled it a “low-profit, high-energy-consuming factory.”Along nearby alleys, a warren of small workshops was making insoles and other shoe components for assembly at Mr. Tang’s factory and other similar plants nearby. Prices for the components have already increased 30 to 50 percent from last year as labor costs and raw material prices rise, Mr. Tang said.“Many of us working in this line of business say that we are basically losing money this year,” he said at his factory on Monday morning, adding that power outages began this summer.Mr. Tang had to turn off his generator for two days last week after residents filed noise complaints with the local government. He also rented a metal cage to cover the generator to reduce the din.Some in the neighborhood, particularly shoe component manufacturers, were sympathetic, voicing a mixture of business pragmatism and nationalism.“Although it’s a bit noisy, I understand it,” said Wang Weidong, the owner of a shoe insole processing workshop. “There’s no other way — we will answer the call of the country.”Li You More

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    The Economy Looks Solid. But These Are the Big Risks Ahead.

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    One concern is that political leaders will mismanage things in the world’s largest and second-largest economies.The low-hanging fruit of the pandemic economic recovery has been eaten. As a result, the expansion is entering a new phase — with new risks.For months, the world economy has expanded at a torrid pace, as industries that were shut down in the pandemic reopened. While that process is hardly complete — numerous industries are still functioning below their prepandemic levels — further healing appears likely to be more gradual, and in some ways more difficult.Reopening restaurants and performance arenas is one thing. Fixing extraordinary backups in shipping networks and shortages of semiconductors, among the most vivid examples of supply shortages holding back many parts of the economy, is harder.And a range of risks, including the hard-to-predict dynamics of Covid variants, could throw this transition to a healthy post-pandemic economy off course.One looming risk is if political leaders mismanage things in the world’s largest and second-largest economies. Namely, in the United States, a standoff over raising the federal debt ceiling could bring the nation to the brink of default. And in China, the fallout from the property developer Evergrande’s financial problems is raising questions about the country’s debt-and-real-estate-fueled growth.The Organization for Economic Cooperation and Development last week projected that the world economy would grow 4.5 percent in 2022, downshifting from an expected 5.7 percent expansion in 2021. Its forecast for the United States shows an even steeper slowdown, from 6 percent growth this year to 3.9 percent next.Of course, a year of 3.9 percent G.D.P. growth would be nothing to scoff at — that would be much faster growth than the United States has experienced for most of the 21st century. But it would represent a resetting of the economy.“We’ve had liftoff, and now we’re at cruising altitude,” said Beth Ann Bovino, chief U.S. economist at S&P Global.After the global financial crisis of 2008-9, the great challenge for the recovery was a shortfall of demand. Workers and productive capacity were abundant, but there was inadequate spending in the economy to put that capacity to work. The post-reopening stage of this recovery is the opposite image.Now there is plenty of demand — thanks to pent-up savings, trillions of dollars in federal stimulus dollars, and rapidly rising wages — but companies report struggles to find enough workers and raw materials to meet that demand.Dozens of container ships are backed up at Southern California ports, waiting their turn to unload products meant to fill American store shelves through the holiday season. Automakers have had to idle plants for want of semiconductors. Builders have had a hard time obtaining windows, appliances and other key products needed to complete new homes. And restaurants have cut back hours for lack of kitchen help.These strains are, in effect, acting as a brake that slows the expansion. The question is how much, and for how long, that brake will be applied.“The kinds of growth rates we are seeing were a bounce-back from a really severe recession, so it’s no surprise that won’t continue,” said Jennifer McKeown, head of the global economics service at Capital Economics. “The risk is that this becomes less about a natural cooling and more about the supply shortages that we’re seeing really starting to bite. That may mean that economic activity doesn’t continue to grow as we’re expecting it to, as instead there is a stalling of activity and price pressures starting to rise.”The problem is that the supply shortages have many causes, and it is not obvious when they will all diminish. Spending worldwide, and especially in the United States, shifted toward physical goods over services during the pandemic, more quickly than productive capacity could adjust. The Delta variant and continued spread of Covid has caused restrictions on production in some countries. And the lagged effects of production shutdowns in 2020 are still being felt.Then there are the risks that lurk in the background — the kinds of things that aren’t widely forecast to be a source of economic distress, but could unspool in unpredictable ways.Debt ceiling brinkmanship in Washington is a prime example. Senate Republicans insist that they will not vote to increase the federal debt limit, and that Democrats will have to do so themselves — while also planning to filibuster Democratic attempts to do so. Failure to reach some sort of agreement would risk a default on federal obligations, and could cause a financial crisis. For that reason, a deal in these cases has always ultimately been done — even if, as in 2011, it created a lot of uncertainty along the way.The risk here is that both sides could be so determined to stick to their stances that a miscalculation happens, like two drivers in a game of chicken who both refuse to swerve. And to those who are closest to American fiscal policymaking, that looks like a meaningful risk.“Chances of a default are still remote, and Congress will likely increase the debt ceiling. but the path to a deal is more murky than usual,” said Brian Gardner, chief Washington policy strategist at Stifel, in a research note. He added that the political game of chicken could spook markets in coming weeks.And on the other side of the Pacific Ocean, the Chinese government has its own challenge, as Evergrande struggles to make payments on $300 billion worth of debt.Real estate has played an outsize role in China’s economy for years. But few analysts expect the problems to spread far beyond Chinese borders. The Chinese banking and financial system is largely self-contained, in contrast to the deep global linkages that allowed the failure of Lehman Brothers in 2008 to trigger a global financial crisis.“Everyone’s learned a trick or two since 2008,” said Alan Ruskin, a macro strategist at Deutsche Bank Securities. “What you have here is the world’s second-largest economy, and one that has lifted all boats, could be slowing more materially than people anticipated. I think that’s the primary risk, rather than that financial interlinkages shift out on a global basis.”All of which could make for a bumpy autumn for the world economy, but which in the most likely scenarios would lead to a solid 2022. If, that is, everything goes the way the forecasters expect. More

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    Beyond Evergrande’s Troubles, a Slowing Chinese Economy

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    Investors are watching whether the property developer defaults. But in the background, the world’s No. 2 economy is flashing numerous warning signs.BEIJING — Global markets have watched anxiously as a huge and deeply indebted Chinese property company flirts with default, fearing that any collapse could ripple through the international financial system.China Evergrande Group, the developer, on Wednesday said it reached a deal that might give it some breathing room in the face of a bond payment due the next day. But that murky arrangement doesn’t address the broader threat for Beijing’s top leaders and the global economic outlook: China’s growth is slowing, and the government may have to work harder to rekindle it.Retail sales were much more weak than expected last month in China, led by slow car sales. Industrial production has slackened, particularly for large freight trucks. And developers sharply reduced new housing projects over the summer, while rushing to finish the projects they had already started.Heavy government spending on new rail lines, highways and other projects is keeping the economy afloat right now, but may not be sustainable through next year.Markets have been riveted by the idea that Evergrande could be China’s “Lehman moment,” a reference to the collapse of the Lehman Brothers investment bank back in 2008 that kicked off the global financial crisis. While many economists in China are pouring cold water over the idea of potential financial contagion, they are pointing to the broad weakness in China’s property market, a mainstay of the economy, and other long-term threats.“This is not a Lehman moment. This is too sensational,” said Xu Sitao, an economist in the Beijing office of Deloitte. “The question is next year.”With Evergrande, it isn’t entirely clear what will happen on Thursday, when bond interest payments are due. On Wednesday, it said in a vaguely worded stock market filing that it had reached an arrangement with Chinese investors to make a payment due the following day, without offering details.It did not mention an $83.5 million payment due Thursday to foreign bondholders. Bloomberg News, citing bond documents, said the company has a 30-day grace period before a missed payment becomes a default. Evergrande did not respond to questions.Chinese policymakers could conceivably step in and rescue Evergrande. But that would run contrary to their efforts to get companies to borrow less and to take some of the steam out of the property market, where apartments for purchase are increasingly unaffordable for many Chinese families in a number of markets.The stock exchange in Hong Kong on Tuesday as the Hang Seng Index dropped over concerns about Evergrande.Jerome Favre/EPA, via ShutterstockPeople familiar with Chinese economic policymaking say that big companies often carry a lot of collateral on their books, so officials believe lenders won’t get fully burned by a collapse. They also cite the tools Beijing has to unwind debts gradually and limit financial disruptions, such as its control of the banking system.Letting Evergrande collapse quickly, on the other hand, risks a broad fall in apartment prices or other potentially unforeseeable shocks to the financial system.Chinese officials have taken short-term measures to shore up confidence. The central bank announced on Wednesday morning that it had temporarily injected about $18.6 billion in credit markets, part of a broader effort in recent days to make sure that ample cash is available.Real estate sales were slowing even before the latest difficulties, in part because of Beijing’s cool-down efforts, depriving Evergrande and other property developers of the cash they need to finish other projects. Sales dropped 7.1 percent by value in July from a year earlier and 18.7 percent in August from the same month last year.Overcapacity in many industrial sectors, coupled with a faltering construction sector, have prompted economists to predict slower growth. Bank of America lowered on Tuesday its forecast for China’s economic growth next year to 5.3 percent from a previous forecast of 6.2 percent.Growth over 5 percent is still strong by most standards. But it would represent a much weaker showing than this year, which many economists project will total 8 percent or higher. It would be considerably slower than the official growth rates China has posted in recent years.Other questions hovering right now over the Chinese economy can be seen in a handful of measures that might at first glance seem to have little to do with the real estate industry, bond prices or Evergrande’s 1.6 million unfinished apartments. The measures gauge the production and sale of heavy-duty freight trucks.Construction companies and manufacturers all over the world tend to stop buying large trucks when they see trouble ahead. Alan Greenspan, the former chairman of the Federal Reserve, used to cite the strength of the freight truck manufacturing industry as one of his favorite predictors of the future health of the American economy.The China Association of Automobile Manufacturers disclosed earlier this month that heavy truck production and heavy truck sales plummeted by nearly half in August compared to the same month last year. Excluding statistical quirks caused by the timing of the Lunar New Year holiday, it was the worst performance for both heavy truck indicators since the spring of 2015, when China was struggling to emerge from a botched currency devaluation.Trucks for export at a sea port in Yantai, China, in July. Truck production and sales plummeted by nearly half in August.CHINATOPIX, via Associated PressThe nosedive in freight truck production and sales is about much more than lost economic confidence, however. It also shows how China’s policies over the past few years temporarily inflated demand and produced severe overcapacity.Stringent new standards for air pollution took effect for freight trucks manufactured beginning July 1. Stricter safety standards are also being phased in, such as a requirement that onboard software and sensors warn drivers when they start to drift out of their traffic lanes.Domestic truck manufacturers expanded their factories last year to build as many trucks as they could before the tougher rules took effect.China’s freight truck manufacturing capacity has ballooned to 1.6 million trucks a year in a market where long-term sales estimates are far fewer than a million trucks a year. Truck dealerships across China are now clogged with rows of unsold trucks.Car sales were also weak last month, adding to uncertainty about whether consumer spending will stay strong in China even as Evergrande struggles. After construction and government spending, the auto industry is one of the biggest sectors of the Chinese economy, playing nearly three times as large a role as exports to the United States.An acute shortage of computer chips has separately affected the production and sale of cars in China, muddying the picture.“The market for car sales is generally in a downturn, partly because of the chip shortage,” said Cui Dongshu, the secretary general of the China Passenger Car Association, a Beijing-based industry trade group.While China faces broad overcapacity and other worries, many economists in China still express more confidence than economists elsewhere that the country can weather its troubles. Economists in China note that the Chinese government has more ability than most to set interest rates and control large movements of money in and out of the country.“China,” said Mr. Xu, of Deloitte, “still has a lot of tools.”Keith Bradsher More

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    Photos: Witnessing the U.S. Economy’s Recovery in 2021

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    September glimmered in the distance. As a hopeful spring gave way to summer, this was to be the month when pandemic restrictions and government aid would fully cease, and when a new season of live gatherings, face-to-face schooling and office work would begin. But events spilled out in unpredictable ways. New York Times photographers around […] More

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    E.C.B. Will Slow Its Crisis-Era Bond Buying

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    The European Central Bank said on Thursday it would slow down the pace of its pandemic-era bond-buying program, one of the main tools it has used to support the eurozone economy through lockdowns, citing “favorable financing conditions” and the inflation outlook.The program, which has lately been purchasing about 80 billion euros, or $95 billion, of mostly government bonds each month, is a way to keep borrowing costs low and encourage economic growth.Other policy measures were left unchanged. Interest rates were held steady, including the so-called deposit rate, which remained at negative 0.5 percent. Policymakers also maintained the size of the bank’s other bond-buying program that was restarted in 2019 to head off a regional recession.In the eurozone, inflation is rising faster than expected, supply chain disruptions and product shortages are pushing costs higher for manufacturers, and there are early signs that the economic recovery is slowing down.It’s a concoction that has created divisions among the central bank’s policymakers about when to slow and then end its enormous bond-buying program. It began in March 2020 as the pandemic spread across Europe, and is meant to buy a total of 1.85 trillion euros in bonds and run until at least next March. The slowdown would help ensure the purchases end on schedule, though the central bank hasn’t ruled out an extension.“Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favorable financing conditions can be maintained with a moderately lower pace of net asset purchases,” the central bank said in statement on Thursday.Thursday’s decisions are the first test of the central bank’s updated forward guidance. In July, policymakers said they were willing to overlook short-term jumps in inflation and would raise interest rates only once it was clear the annual inflation rate would reach 2 percent “well ahead” of the end of the central bank’s projection horizon and stay around that level over the medium term.New projections for inflation and economic growth will be published later on Thursday when the central bank’s president, Christine Lagarde, will hold a press conference.. The previous forecasts, in June, predicted inflation would peak at 2.6 percent in the fourth quarter and decline to 1.5 percent in 2022 and 1.4 percent in 2023.But inflation has already risen to 3 percent in August, the highest in nearly 10 years, the region’s statistics agency said last week. So far, policymakers have been betting that the jump in inflation will be temporary, like other central banks around the world.In recent years preceding the pandemic, the inflation rate was below the bank’s 2 percent target.“The stars are much better aligned than they have been for a long time for the return of inflation back to 2 percent,” Klaas Knot, the governor of the Dutch central bank and a member of the governing council at the European Central Bank, said last week.Jens Weidmann, the head of the German central bank, said that policymakers shouldn’t ignore the risk of “excessively high inflation” and that they should not “commit to our very loose monetary policy stance for too long.”But the European Central Bank as a whole has been more cautious than the Federal Reserve and Bank of England about preparing markets for a return to normal policy. While the economy is rebounding — rising 2.2 percent in the second quarter from the first three months of the year — Ms. Lagarde has highlighted the uncertainty posed by the spread of the Delta variant.Recently, Philip Lane, the central bank’s chief economist, said there were headwinds for the economy in the second half of the year, including supply-chain bottlenecks that could be more persistent than expected.While the pandemic-era bond program might be approaching its end, the central bank is expected to maintain its older bond purchase effort, under which the bank buys 20 billion euros in assets a month. Many analysts expect policymakers to increase the size of purchases to keep providing stimulus to the economy even after the immediate impact of the pandemic has passed. More

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    Inflation's Worldwide Surge May Be a Good Sign

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    Inflation has surged across advanced economies. The shared experience underlines that price gains come from temporary drivers — for now.Price gains are shooting higher across many advanced economies as consumer demand, shortages and other pandemic-related factors combine to fuel a burst of inflation.The spike has become a source of annoyance among consumers and worry among policymakers who are concerned that rapid price gains might last. It is one of the main factors central bankers are looking at as they decide when — and how quickly — to return monetary policy to normal.Most policymakers believe that today’s rapid inflation will fade. That expectation may be reinforced by the fact that many economies are experiencing a price pop in tandem, even though they used vastly different policies to cushion the blow of pandemic lockdowns.The shared inflation experience underscores that mismatches between what consumers want to buy and what companies are able to deliver are helping to drive the price increases. While those may be amplified by worldwide stimulus spending, they are not the simple result of nation-specific policy choices — and they should eventually work themselves out.“There is a lot of stimulus in the system, and it is pushing up demand and that’s driving higher inflation,” said Kristin Forbes, a Massachusetts Institute of Technology economist and former external member of the Bank of England’s Monetary Policy Committee.“Some of these big global moves do tend to pass through and prove temporary,” Ms. Forbes said. “The big question is: How long will these supply chain pressures last?”The United States Federal Reserve’s preferred price index rose 4.2 percent in July from the prior year, more than double the central bank’s 2 percent target, which it seeks to hit on average over time. In the eurozone, inflation recently accelerated to the highest level in about a decade. In Britain, Canada, New Zealand, South Korea and Australia, price gains have jumped well above the level central banks set as their goals.The big increases have come as supply chains have snarled around the world, adding to transportation costs and throwing the delicate balance of corporate globalization badly out of whack. Prices for airline tickets and hotel rooms dipped last year in the depths of the pandemic, and now they’re bouncing back to normal levels, making the numbers look higher than they would if compared with a less depressed base. Neither issue should last indefinitely.There is a danger that the global price surge could last longer — and become more country-specific — if workers in nations experiencing high inflation today bargain for wage increases and are more accepting of steadily higher prices. Bringing entrenched inflation back under control could require painful monetary policy responses, ones that would probably plunge national economies back into recession.Given those high stakes, the mere possibility of lasting inflation is ramping up pressure on central banks around the world to consider dialing back their still-substantial monetary policy support — even though many are not yet fully recovered and the pandemic has not ended.Economies around the world are growing quickly this year, partly as a result of enormous government spending that has pumped some $8.7 trillion into the advanced Group of 20 markets since January 2020 and central bank policies that have made money very cheap to borrow and spend. Central banks have been buying bonds to hold down longer-term interest rates and keeping short-term borrowing costs near or even below zero.It’s not just higher prices that advanced economies have in common. Complaints about labor shortages in some fields are also bubbling up around the world. Job vacancy rates have been climbing in Europe’s construction, leisure and hospitality, and information technology sectors. In Britain, firms widely complain of labor shortages, and a dearth of truck drivers caused partly by the nation’s exit from the European Union has disrupted supply chains and fueled shortages of milkshakes at McDonald’s and peri-peri chicken at Nando’s, a restaurant chain famous for the dish.A restaurant in London in June. Job vacancy rates have been climbing in Europe’s construction, leisure and hospitality, and information technology sectors.Andrew Testa for The New York TimesThose widespread trends highlight the oddities of the current economic moment. Commerce came to a sudden stop and then abruptly restarted when government relief payments padded consumers’ wallets, making people eager to spend even as manufacturers struggled to get back to full production and restaurants scrambled to staff back up.Still, some central bankers are growing nervous about their policies in countries where inflation is higher and labor supply issues are beginning to push up wages. They fret that a cocktail of low interest rates and big government bond buying will add fuel to the temporary-inflation fire, helping asset prices and consumer prices to remain higher. Prominent commentators, both in the media and in financial centers from the City of London to Wall Street, have added to the chorus arguing that central bankers are “behind the curve.”In Britain, Michael Saunders, a policymaker, already voted to end the central bank’s bond-buying program, predicting that some of the inflation spike would not be temporary. A few European central bankers have indicated that they should start debating slowing down their pandemic-era stimulus purchase program, and at least one has even suggested an immediate slowdown. Some U.S. officials, including the president of the Federal Reserve Bank of St. Louis, James Bullard, have said that today’s inflation might not fully fade and that policy ought to be poised to react.The extreme worriers are in the minority. Most policymakers in advanced economies are betting that price increases be temporary, and that inflation might even fade back to uncomfortably low levels over the longer term. From Ottawa to Frankfurt, they have warned against overreacting.“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Jerome H. Powell, the Fed chair, said during a recent speech. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”Before the pandemic, advanced economies had spent years trying to coax inflation higher, trying to stop an economically damaging downward spiral that had begun to take hold.Slow price gains may sound like good news to people buying gas, baguettes or hot dogs, but inflation counts into interest rates, so its downward trend in the 21st century has left less room for policymakers to cut rates to rescue the economy during times of trouble. That has helped to weaken recoveries, dragging inflation even lower and fueling a cycle of stagnation.Even amid the reopening, Japan — a notable outlier among advanced economies — continues to fight that long-run war, battling outright price declines. Coronavirus outbreaks have kept shoppers there at home, weighing on prices for Uniqlo attire and snacks alike. Persistent forces like population aging have also put a lid on demand and constrained companies’ ability to charge more.A shopping district in Tokyo last month. Coronavirus outbreaks have kept shoppers there at home.Franck Robichon/EPA, via ShutterstockOther economies are expected to return to their trends of slow growth and weak inflation as the pandemic shock fades and population aging becomes a more dominant force, said Jay Bryson, chief economist at Wells Fargo. “It’s like going up a step,” Mr. Bryson said. “Once you get to the next step, the rate of increase drops off. It’s a one-time price level adjustment because of the pandemic.”If inflation does fade as policymakers expect, the current burst could actually offer benefits: In the United States, it has helped to nudge inflation expectations back out of the dangerously low zone, to levels that are historically consistent with healthy price gains. It has proved harder for central bankers to move prices up than it is for them to cool them off, so that opportunistic inflation could help the Fed to nail its price goals in the longer run.But if it takes too long to go away, the consequences could be more serious.“If I’m wrong and inflation does get out of hand, that would lead to slower economic growth in a longer-run sense,” Mr. Bryson said, explaining that high inflation tends to bounce around a lot, making it tough for companies to plan and invest.But he said that even if higher prices lasted, they might settle in at 2.5 percent or 3 percent — which would not cause meaningful problems. By contrast, inflation in the United States popped to double digits during the Great Inflation of the 1970s.“I don’t think we’re talking about 1970s-style inflation,” agreed Mark Gertler, an economist at New York University. Policymakers around the world have committed to fighting inflation and will not allow it to run out of control. “Central banks can always make inflation transitory by raising interest rates enough.”Eshe Nelson More

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    in Economy

    Why the Taliban Desperately Need Cash to Run Afghanistan

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    The group has long tapped underground banks and opium to fund Afghanistan’s insurgency. Fixing the nation’s problems will require a lot more than that.As Afghans pay surging prices for eggs and flour and stand in long lines at the bank, money changers like Enayatullah and his underground financial lifeline have found themselves in desperate demand.Enayatullah — his family name withheld — holds down a tiny point in a sprawling global network of informal lenders and back-room bankers called hawala. The Taliban used hawala to help fund their ultimately successful insurgency. Many households use it to get help from relatives in Istanbul, London and Doha. Without cash from hawala, economic life in whole swaths of Afghanistan would come to a crashing halt.That is now a very real possibility. Foreign aid has dried up. Prices are surging. The value of the afghani currency is tumbling. The country’s $9.4 billion in reserves have been frozen.And hawala won’t be enough, said Enayatullah, who says people’s need for money has become so desperate in the last week he raised his commission to 4 percent per transaction, about eight times his usual rate. The system is now struggling with a lack of money, leading the Taliban and dealers themselves to rein in activity to preserve cash.“The demand,” Enayatullah said, “is too much.”The Taliban won the war in Afghanistan, and an economic crisis may be their prize. They have been cut off from the international banking system and from the country’s previous funding sources, like the International Monetary Fund, the World Bank and the United States government. Foreign aid makes up nearly half of economic output.Without other sources of money, millions of Afghan people could lose the gains they made, in fits and starts, over the past two decades. Already, drought conditions have created a real risk of hunger.“We have conflict. We have war. This is another misery,” said Shah Mehrabi, a board member of Afghanistan’s central bank. “You will have a financial crisis and it will push families further into poverty.”Food prices soared last week after the Taliban took over, at a market in Kabul, Afghanistan.Jim Huylebroek for The New York TimesLong before Afghanistan had formal institutions like banks, it had the hawala system. Millions of Afghans, shut out from formal banking, used it to send and receive remittances, as have migrant workers and others around the world.The system functions on the premise that people want to send equivalent amounts of money between two locations. Loans and transfers are recorded on ledgers, but money doesn’t have to change hands. Those features make it useful for evading taxes, paying bribes and laundering ill-gotten gains.Hawala was a necessity under the Taliban-led Afghanistan of two decades ago, before the American invasion in 2001, when money from illicit sources greased the country’s financial wheels. In addition to hawala, opium from the country’s vast poppy fields and smuggling brought the country money from the rest of the world, offsetting weak trade. As insurgents, the Taliban funded themselves by taxing smuggled goods like televisions and fuel, in transactions often financed through hawala, and through the drug trade.But the Afghanistan of 2021 is a country transformed. The economy, though its growth has been unsteady over the past decade, is five times the size it was in the early 2000s. Once scarce in most places, electricity is now widely available. Smartphones and internet access are common.Foreign money helped. Over the two decades, the United States spent more than $145 billion on reconstruction activities in Afghanistan, according to the U.S. government. Much of it was used to build the Afghan security forces, but funds also went toward large-scale infrastructure projects and an economic support fund. More than three quarters of the Afghan government’s $11 billion annual public expenditures was paid for by donor funding.The Taliban will be hard-pressed to make up that shortfall.Since taking over Afghanistan, the Taliban have said they will stop production of opium. But for the hawala system to work, Afghanistan must ultimately find sources of hard currency to lubricate the lines of credit that would snake back into the country. With exports in 2019 of about $870 million — mostly carpets, plus figs, licorice and other agricultural products — Afghanistan has little to offer on a large scale that is as lucrative as opium.The Taliban could see support from governments like Pakistan, Iran and China that might have their own reasons for keeping relations with Afghanistan warm. Trade has already started up again with Iran, said David Mansfield, an independent consultant and an expert on rural Afghanistan, citing satellite imagery of fuel tankers and transit trucks moving across the border. He has estimated that during its insurgency, the Taliban was able to raise more than $100 million a year from informally taxing goods from Iran and southern Afghanistan.Even if the Taliban raised several multiples more than that, it would mean a return to the minimalist state like the 1990s.“Economic crisis, humanitarian disaster, more refugees,” Mr. Mansfield said. “The other side of this is we have an Afghan population in the past 20 years who have seen some degree of transformation. Their livelihoods have improved.”People stood in line outside Azizi bank in Kabul on Sunday, the first day banks reopened in Afghanistan’s capital.Jim Huylebroek for The New York TimesThe hawala system, though central to life in Afghanistan, won’t be enough on its own. While many hawala transactions exist only on ledgers, they are ultimately backed by cold, hard cash often held by hawala dealers called hawaladars. In Afghanistan, say experts, hawaladars regularly use the local currency, the afghani, to buy American dollars from Afghanistan’s central bank, a transaction that can help stabilize the afghani’s value.Understand the Taliban Takeover in AfghanistanCard 1 of 6Who are the Taliban? More