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Eurozone Inflation Eases on Lower Energy Prices

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The rate of price increases in countries using the euro slowed to 9.2 percent in December, down from 10.1 percent a month earlier.Lower energy prices helped to push inflation in Europe lower last month, the European Commission reported on Friday, but many prices are still rising at a brisk pace and policymakers have given little indication that they plan to halt planned interest rate increases.Consumer prices in the countries that use the euro as their currency rose at an annual rate of 9.2 percent in December, down from the double-digit levels of 10.1 percent in November and 10.6 percent in October.Declines in inflation reported this week in France, Germany and Spain sparked hopes that the relentless rise across the continent may have finally peaked. But several influential voices urged caution, noting that while the so-called headline rate of inflation has eased, core inflation, which strips out volatile food and energy prices, has not shown the same drop. In fact, for December, the eurozone’s core rate of inflation rose to 5.2 percent, from 5 percent the month before.Europe has benefited from a streak of mild weather, which has lowered the demand for energy, particularly the natural gas used to power much of the continent’s heating infrastructure. Several governments have also offered subsidies to blunt the painfully high energy prices that consumers pay. The drop in Germany’s inflation rate, to 9.6 percent in December from 11.3 percent the month before, was partly due to one-time assistance to help households pay their energy bills, according to the government’s statistics office.The data showed that energy prices in the eurozone rose at an annual rate of 25.7 percent in December, down from as high as 41.5 percent in October. “Europe is very lucky at the moment with the weather,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics. He added that government energy relief had inserted a “wedge between reality and the data.”“It’s a price control,” he said, and “once you take out that, it’s not as clear that inflation is that benign.”Nearly all eurozone countries marked a decline in their main inflation rate in December, including France (6.7 percent, from 7.1 percent in November), Italy (12.3 percent, from 12.6 percent), Spain (5.6 percent, from 6.7 percent) and the Netherlands (11 percent, from 11.3 percent). The numbers bolstered the argument that the eurozone’s record-setting pace of inflation in the past year will slowly lose steam in 2023. “We are likely past the peak,” said Riccardo Marcelli Fabiani, an economist at Oxford Economics, in a note on Friday. But he added, “we expect inflation to cool only gradually, remaining high in the short term.”The European Central Bank, which has a target of 2 percent annual inflation, has already indicated that it is likely to raise interest rates half a point in February. Christine Lagarde, the bank’s president, said last month that she expected interest rates to rise “significantly further, because inflation remains far too high and is projected to stay above our target for too long.”The December data, showing easing overall inflation but persistent underlying price pressure, will probably stoke “tense negotiations among policymakers in the next few months” noted Mr. Vistesen after the numbers were released. The Federal Reserve, the U.S. central bank, is also expected to continue raising rates.This week, Gita Gopinath, first deputy managing director of the International Monetary Fund, told the Financial Times that the Fed should “stay the course” with its planned increases.“I think it’s clear that we haven’t turned the corner yet on inflation,” she said. At the same time, the fund has also projected that a third of the world economy will face recession this year. More

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    Eurozone Inflation Reaches 10.7 Percent as Economies Slow Down

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    The rise in consumer prices hit another record in October, with more than half of the countries that use the euro registering double-digit increases.Consumer prices in the countries that use the euro as their currency rose at a stunning annual rate of 10.7 percent in October, the European Commission reported on Monday, while economic growth across the continent grew by 0.2 percent over the quarter that spanned July, August and September.Prices have been on an relentless upward march since last year, as painfully high energy and food prices continued to push inflation to record levels. Over the past 12 months, energy prices rose by 41.9 percent while food prices increased by 13.1 percent.More than half of the 19 countries in the eurozone recorded double-digit inflation rates in the year through October, including Germany (11.6 percent), the Netherlands (16.8 percent), Italy (12.8 percent) and Slovakia (14.5 percent), with the Baltic countries at the highest end of the spectrum with rates over 21 percent.In September, the inflation rate across the eurozone was 9.9 percent. Twelve months ago, it was 4.1 percent.“This is a significant acceleration,” said Lucrezia Reichlin, an economist at the London Business School. “Inflation is becoming broad-based.”Although economic growth overall slowed from 0.8 percent in the second quarter — April, May and June — some countries registered bigger expansions than analysts anticipated. Germany, Europe’s largest economy, grew by 0.3 percent during the third quarter, driven in part by consumer spending. Italy’s economy grew by 0.5 percent and Sweden’s by 0.7 percent. Elsewhere, growth slowed. In France and Spain, growth increased by just 0.2 percent. Austria and Belgium saw their economies shrink by 0.1 percent.In the larger bloc of 27 countries that make up the European Union, third-quarter growth also increased by 0.2 percent.The International Monetary Fund has warned that “European policymakers face severe trade-offs and tough policy choices as they address a toxic mix of weak growth and high inflation that could worsen.”Inflation is vexing many of the world’s economies and may worsen, particularly in the wake of Russia’s withdrawal from an agreement that allowed grain exports from Ukraine that is likely to push up food prices.Last week, the United States announced that consumer prices rose by 6.2 percent in the year through September, by one measure. Britain’s inflation rate was 8.8 percent over the same period.Central banks appear resolutely determined to halt the rise. “Inflation remains far too high and will stay above the target for an extended period,” Christine Lagarde, the president of the European Central Bank, said last week after announcing the bank was raising interest rates by three-quarters of a percentage point for the second time in a row.The International Monetary Fund has also urged central bankers to stay the course possibly through next year. It noted that “almost half the recent surge in European core inflation remains unexplained by its usual drivers,” suggesting that the war in Ukraine and aftershocks of the coronavirus pandemic were contributing to a new inflationary dynamic.The Federal Reserve is expected to raise interest rates by three-quarters of a percentage point when policymakers meet on Wednesday. It would be the sixth increase this year. The Bank of England, meeting on Thursday, is also expected to raise rates by the same amount.However painful higher interest rates may be for consumers and borrowers in the United States, the sting is even sharper in other regions around the world. Higher interest rates attract investors, which pushes up the value of the dollar. For emerging nations with high debt bills denominated in dollars, though, their already heavy burden grows even larger. At the same time, nations that have to import American goods or essentials like energy and food that are often priced in dollars, get much more expensive. Those countries get poorer.While most economists have urged a hard line on inflation, there are an increasing number of voices questioning whether central bankers are going too far, too fast. Higher interest rates are not going to suddenly increase the supply of oil, wheat and microchips, and may even exacerbate shortages by stunting investment.There is also fear that efforts to corral inflation will accelerate countries’ slide into recession by choking off investment and raising unemployment. Several analysts said on Monday that they expected growth in the final three months of the year to deteriorate.Andrew Kenningham, the chief Europe economist at Capital Economics, warned in a report that the eurozone “is heading for a deeper recession and higher inflation than most expect.” More

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    Omicron Is an Economic Threat, but Inflation Is Worse, Central Bankers Say

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    Within 24 hours, the Federal Reserve, Bank of England and European Central Bank all stepped forward to deal with price increases.There is still a lot scientists do not know about Omicron. There is cautious optimism — but no certainty — about the effectiveness of vaccines against this fast-spreading variant of the coronavirus, and experts do not fully understand what it means for public health or the economy.But central banks have concluded they don’t have the luxury of waiting to find out.Facing surging inflation, three of the world’s most influential central banks — the Federal Reserve, Bank of England and European Central Bank — took decisive steps within 24 hours of each other to look past Omicron’s economic uncertainty. On Thursday, Britain’s central bank unexpectedly raised interest rates for the first time in more than three years as a way to curb inflation that has reached a 10-year high. The eurozone’s central bank confirmed it would stop purchases under a bond-buying program in March. The day before, the Fed projected three interest rate increases next year and said it would accelerate the wind down its own bond-buying program.The perception that the Bank of England would “view the outbreak of the Omicron variant with greater concern than it actually did” caused the surprise in financial markets, ” Philip Shaw, an economist at Investec in London, wrote in a note to clients. The Fed also “carried on regardless” with its tightening plans, he added.Aside from Omicron, the central banks were running out of reasons to continue emergency levels of monetary stimulus designed to keep money flowing through financial markets and to keep lending to businesses and households robust throughout the pandemic. The drastic measures of the past two years had done the job — and then some: Inflation is at a nearly 40-year high in the United States; in the eurozone it is the highest since records began in 1997; and price rises in Britain have consistently exceeded expectations.It is still unknown how Omicron will affect the economic recovery. Vaccine makers are still testing their shots against the variant.Alessandro Grassani for The New York TimesThe heads of all three central banks have separately decided that the price gains won’t be as temporary as they once thought, as supply chains take a while to untangle and energy prices pick up again.Andrew Bailey, the governor of the Bank of England, said that policymakers in Britain were seeing things that could threaten inflation in the medium-term. “So that’s why we have to act,” he said on Thursday.“We don’t know, of course, a lot about Omicron at the moment,” he added. It could slow the economy, and already there are canceled holiday parties, fewer restaurant bookings, less retail foot traffic and signs that more people are staying home. But Omicron could also worsen inflationary pressures, he said. “And that’s, I’m afraid, a very important factor for us.”Already, price gains have popped higher this year as snarled supply chains and goods shortages have raised shipping and manufacturing costs. Depending on the severity of Omicron and how governments react, the variant could cause factories to shut down and could keep supply chains in disarray and workers at home, prolonging goods and labor shortages and pushing inflation higher.At the same time, policymakers are assuming the impact on the economy will be milder than previous waves of the virus. With each surge in cases and reintroduction of restrictions, the dent to the economy has gotten smaller and smaller. This would lessen the risk that the central banks end up tightening monetary policy into a downturn.Still, it is an awkward balancing act. On the same day the Bank of England raised rates, its staff cut half a percentage point from their growth forecasts for the final three months of the year. By the end of 2021, the British economy will still be 1.5 percent smaller than its prepandemic size, the bank estimated.Christine Lagarde, the president of the European Central Bank, said Omicron had created uncertainty in the face of a strong recovery.Pool photo by Ronald Wittek“From a macroeconomic perspective, it’s unlikely that the fourth wave is going to have as meaningful an impact as we’ve seen even during last winter,” said Dean Turner, an economist at UBS Global Wealth Management.The economic recoveries from the pandemic, though bumpy, haven’t been derailed yet. Unemployment rates are falling in Europe and the United States, and businesses are complaining that is difficult to hire staff. That, combined with the burst of inflation, was enough to bolster the case for some monetary tightening.“There’s a lot of uncertainty with the new variant, and it’s not clear how big the effects would be on either inflation or growth or hiring,” Jerome H. Powell, the Fed chair, said on Wednesday. But there is a “real risk” inflation could be more persistent, he also said, which was part of the reason the bank sped up its plans to taper its bond purchases.Ending the Fed’s bond purchases sooner would give the central bank room to react to a wider range of economic outcomes next year, Mr. Powell said.“The data is pretty glaring,” Mr. Turner of UBS said of recent statistics on inflation and employment. “There’s only so much caution you can get away with,” before central banks need to take action, he said.Omicron has created uncertainty in the face of a strong recovery, Christine Lagarde, the president of the European Central Bank said on Thursday after she outlined how the bank would end its largest pandemic-era stimulus measure.Vaccine-makers are still testing their shots against Omicron and medical officials are encouraging restraint when it comes to socializing rather than implementing new lockdowns, but central bankers are marching ahead because time isn’t on their side. The effect of monetary policy decisions on the wider economy isn’t immediate.The Bank of England is forecasting that inflation will peak at 6 percent in April, three times the central bank’s target. Within such a short time frame, there is little policymakers can do to stop that from happening, but they can try to signal to businesses and unions setting wages that they will act to stop higher inflation from becoming entrenched, said Paul Mortimer-Lee, the deputy director of the National Institute of Economic and Social Research in London. This may prevent higher prices from spilling over into significantly higher wages, which could cause businesses to raise prices even more.While all three central banks are facing similar problems with high inflation and are keeping watch over wage negotiations, their future challenges are different.The Federal Reserve and Bank of England are worried about the persistence of high inflation. For the European Central Bank, inflation in the medium term is too low, not too high. It is still forecasting inflation to be below its 2 percent target in 2023 and 2024. To help reach that target in coming years, the central bank will increase the size of an older bond-buying program beginning in April, after purchases end in the larger, pandemic-era program. This is to avoid “a brutal transition,” Ms. Lagarde said.She warned against drawing strong comparisons between Britain, the United States and the eurozone economies.“Those three economies are at a completely different states of the cycle,” she said. “We are in a different universe and environment,” even though there might be some spillover effects across countries from the actions each central bank takes.Melissa Eddy More

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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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    Fed Joins Climate Network, to Applause From the Left

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    AdvertisementContinue reading the main storySupported byContinue reading the main storyFed Joins Climate Network, to Applause From the LeftThe central bank joined a network of global financial regulators focused on climate risk. The response to the move underlined its tricky politics.“The public will expect that we do figure out what are the implications of climate change for financial stability, and that we do put policies in place,” Jerome H. Powell, the Fed chair, said this month at a Senate hearing.Credit…Al Drago for The New York TimesDec. 15, 2020, 4:34 p.m. ETWASHINGTON — The Federal Reserve is joining a network of central banks and other financial regulators focused on conducting research and shaping policies to help prepare the financial system for the effects of climate change.The Fed’s board in Washington voted unanimously to become a member of the Network of Central Banks and Supervisors for Greening the Financial System, it said in a statement on Tuesday. The central bank began participating in the group more than a year ago, but its formal membership is something that Democratic lawmakers have been pushing for and that Republicans have eyed warily.The Fed’s halting approach to joining underlines how politically fraught climate-related issues remain in the United States.The network exists to help central banks and other regulators exchange ideas, research and best practices as they figure out how to account for environment and climate risk in the financial sector. While the Fed had participated informally, its decision to join as a member is the latest sign of its recognition that the central bank must begin to take extreme weather events into account as they occur with increasing frequency and pose a growing risk to the financial system — whether doing so is politically palatable or not.“The public will expect that we do figure out what are the implications of climate change for financial stability, and that we do put policies in place,” Jerome H. Powell, the Fed chair, said this month at a Senate hearing. “The broad response to climate change on the part of society really needs to be set by elected representatives — that’s you. We see implications of climate change for the job that you’ve given us, and that’s what we’re working on.”Still, the latest move could incite a backlash. The announcement comes shortly after Republican House members urged Mr. Powell and the vice chair for supervision, Randal K. Quarles, in a letter on Dec. 9 not to join the network “without first making public commitments” to accept only policies that would not put the United States at a disadvantage or have “harmful impacts” on American bank customers.Republicans have been particularly concerned that increased attention to climate risk by financial regulators could imperil credit access for fossil fuel and other energy companies. For instance, banks might be less likely to extend credit to those industries if regulators viewed such loans as risky and made them harder to provide.Mr. Powell had recently emphasized that the Fed was likely at some point to join the network alongside its peers, including the Bank of England and Bank of Japan, and the central bank first indicated last month that it would soon be joining the group. Mr. Quarles said during congressional testimony that the Fed was in the process of requesting membership and expected that it would be granted, in response to questions from Senator Brian Schatz, Democrat of Hawaii.“Now that they have joined this international effort, I will expect them to take further concrete steps towards managing climate risks,” Mr. Schatz said in a statement in response the announcement on Tuesday. “That includes setting clear supervisory expectations for how banks should manage their climate risk exposure, and using tools like stress testing to hold them accountable.”The Fed did not comment on why it decided to join now and — despite several requests since Mr. Quarles’s statement — would not say when the central bank had applied to join. Joining the network requires a formal email request from a central bank’s leader or head of supervision.The move is the latest step in an evolution in which the Fed, which once rarely spoke publicly about the issue, has paid more public attention to climate change.Business & EconomyLatest UpdatesUpdated Dec. 15, 2020, 4:17 p.m. ETEuropean Central Bank will lift ban on bank dividends, a sign of cautious optimism.Top congressional leaders met to discuss a stimulus deal and a year-end spending bill before the deadline on Friday.European truck makers say they will phase out fossil fuel vehicles by 2040.The Federal Reserve Bank of San Francisco, led by Mary C. Daly, held the system’s first conference on climate last year. Lael Brainard, a Fed governor and the lone Democrat on the central bank’s board in Washington, spoke there, and she has delivered other remarks on the topic. For the first time, the Fed’s financial stability report this year included an in-depth section on financial risks posed by climate change.Even so, the Fed has been more reticent than many of its peers when it comes to embracing a role in working to alleviate climate change and manage its fallout. The Bank of England has unveiled its plans to run banks through climate stress tests — which will test how their balance sheets will fare amid extreme weather events — though they have been postponed by the coronavirus pandemic. The president of the European Central Bank, Christine Lagarde, has indicated that her central bank is considering whether it should take climate into account when buying corporate debt.Climate change is a partisan topic in the United States, so more aggressive action to combat it could open up the Fed — which prizes its independence — to political attack. The Trump administration denied or questioned the science behind climate change, and though the incoming administration of Joseph R. Biden Jr. is poised to make it a top issue, many Republican lawmakers stand ready to police the Fed’s embrace of climate-related policy.“I’m going to be raising this issue much more vociferously — I think my colleagues will as well,” Representative Andy Barr, Republican of Kentucky and the lead signatory on the Dec. 9 letter, said in an interview on Monday. Mr. Barr said he was concerned that the Fed might move toward carrying out climate stress tests or put in place other policies that would make it harder for oil and coal companies to gain access to credit.Democrats will struggle to get policies like the so-called Green New Deal through Congress, he said, and he worries they will try to carry out their policy objectives through the “backdoor” of financial regulation. Mr. Barr said both Mr. Quarles’s statement that the Fed would be joining the Network of Central Banks and Supervisors for Greening the Financial System and Mr. Powell’s recent comments caught his attention.“The enormous power of the Fed should not be weaponized to discriminate against a wide swath of American industry,” he said.But in a demonstration of the competing pressures on the central bank, groups that applauded the Fed’s announcement on Tuesday painted joining the network as merely a first step.“Given that it is responsible for the safety and security of the world’s largest economy, we hope that it will not only catch up with central banks around the world, but, in time, lead the way in addressing systemic financial risk,” Steven M. Rothstein, the managing director of the Ceres Accelerator for Sustainable Capital Markets, said in a statement. The group works with investors and has been pushing for the Fed to join the network, including in a report and letter this year.“Our economy deserves no less,” Mr. Rothstein said.AdvertisementContinue reading the main story More