Ultimate Resource On Global Inflation And Rising Interest Rates (#GotBitcoin)

Global Food Costs Keep Climbing In Threat To Consumer Wallets. Ultimate Resource On Global Inflation And Rising Interest Rates (#GotBitcoin)

The global food-price rally that’s stoking inflation worries and hitting consumers around the world shows little sign of slowing.

Even with grain prices taking a breather on good crop prospects, a United Nations gauge of global food costs rose for a 10th month in March to the highest since 2014. Last month’s advance was driven by a surge in vegetable oils amid stronger demand and tight inventories, according to Abdolreza Abbassian, a senior economist at the UN’s Food and Agriculture Organization.

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Food prices are in the longest rally in more than a decade amid China’s crop-buying spree and tightening supplies of many staple products, threatening faster inflation. That’s particularly pronounced in some of the poorest countries dependent on imports, which have limited social safety nets and purchasing power and are struggling with the Covid-19 pandemic.

Breakdown Of Last Month’s Food Costs:

* The FAO’S Food Price Index Rose 2.1% From February.
* Vegetable Oil Prices Jumped 8% To The Highest Since June 2011.
* Meat And Dairy Costs Rose, Boosted By Asian Demand.
* Grains And Sugar Prices Fell.

Grains prices recently climbed to multiyear highs as China imports massive amounts to feed its hog herds that are recovering from a deadly virus. Still, there are signs that tight supplies may get some relief from upcoming wheat harvests in the Northern Hemisphere.

“Generally speaking, supplies for now are adequate,” Abbassian said. “We might have reached a level whereby from now on even if we see price increases, they may be a bit more subtle” than advances seen in previous months, he said.

Inflation Has Gone K-Shaped In The Pandemic Like Everything Else

Low-income Americans bore the brunt of job losses when the pandemic arrived. Now they’re getting hit hardest by price increases as the economy recovers.

The headline consumer inflation rate in the U.S. remains subdued, at 1.7% — but it masks large differences in what people actually buy.

Some of the biggest price hikes of recent months, for example, have come in gasoline. A gallon of regular is up 75 cents since late last year –- adding more than $60 a month to the budget of someone who fills up with 20 gallons a week.

Food-price inflation is running at more than double the headline rate, and staples like household cleaning products have also climbed.

Price increases like these are causing trouble all over the world — and they tend to hurt low-income people most. That’s because groceries or gas take up a bigger share of their monthly shopping basket than is the case for wealthier households, and they’re items that can’t easily be deferred or substituted.

K-Shaped

An analysis by Bloomberg Economics, which reweighted consumer-price baskets based on the spending habits of different income groups, found that the richest Americans are experiencing the lowest level of inflation.

Those same high-earners already posted windfall gains during what’s been labeled a K-shaped recovery from the pandemic. Their net worth surged, thanks to booming stock and real-estate markets -– and they mostly kept their jobs and were able to work from home.

What Bloomberg Economics Says…

“On average, higher-income households spend a smaller fraction of their budgets on food, medical care, and rent, all categories that have seen faster inflation than the headline in recent years, and 2020 in particular.”

— Andrew Husby, Economist

The richest 10% of households captured 70% of wealth created in 2020, according to the Federal Reserve, while the bottom half got just 4%. A January study by Opportunity Insights, a Harvard research project, found that the recession was essentially over for those making at least $60,000 a year, while employment among the lowest-paid –- who earn less than half that amount –- was still almost 30% below pre-pandemic levels.

The question of who exactly gets hurt by higher prices could become more urgent as inflation accelerates. Most economists expect a pickup in the next 12 months.

The Fed, which is in charge of keeping inflation under control, says any increase will likely prove temporary. The central bank isn’t planning to use its inflation-fighting tool of higher interest rates anytime soon.

The idea behind the Fed’s new thinking is that allowing the economy to run a bit hotter — and inflation to creep a bit higher — will actually help to reduce income inequalities, because it will encourage a strong jobs market that benefits low-paid Americans the most. There’s some evidence that this is already happening in the restaurant, hotel and other service industries.

Meanwhile, the Biden administration says it will push U.S. statisticians to produce more detailed data that breaks down economic outcomes for different racial or income groups.

That initiative could have consequences for people whose incomes are tied to measures of inflation — like recipients of Social Security or food stamps. They can get squeezed when those gauges fail to accurately capture changes in the cost of living. There’s been talk in the past, for example, of pegging Social Security to an index that specifically measures the inflation experienced by older people.

‘Uneven Effects’

The distributional questions raised by higher prices aren’t just a U.S. phenomenon.

A United Nations gauge of global food costs rose for a tenth straight month in March, the longest run of increases since 2008 when the world faced the first of two food crises within a few years.

“The food price story and inflation story are important to the issue of equality,” says Carmen Reinhart, the World Bank’s chief economist. “It’s a shock that has very uneven effects.”

The problem of K-shaped inflation predates the pandemic and may have deep-rooted causes, according to Xavier Jaravel, an assistant professor at the London School of Economics.

His research has shown that a key reason why richer people experience lower rates of inflation is that there’s more competition among producers for their dollars –- leading to higher levels of innovation in the kind of goods and services bought by the wealthy, which helps keep prices down.

“One can hope that statistical agencies around the world will soon adopt new data sources and price indices to better measure inflation inequality,” Jaravel wrote in a recent paper, “and that economists will pay more attention to the distributional effects of prices.”

Updated: 8-20-2021

Why Inflation Is Scaring Latin America If Not The Fed

The U.S. Federal Reserve, like many other central banks, sees inflation from the reopening of economies disrupted by the pandemic to be “transitory,” and it’s not expected to raise interest rates until at least next year.

Latin America’s policy makers, by contrast, are rushing to reverse ultra-low borrowing costs. Since late June, central banks in Mexico, Peru, Chile, Uruguay and even Paraguay followed the early move by Brazil and increased rates, while many expect Colombia to follow soon.

Latin America was perhaps hit harder than any other region by Covid-19 and is experiencing a quick economic rebound that puts pressure on prices.

Other reasons for the difference, though, may have to do with the continent’s high levels of inequality, informality and political instability — together with a history of inflationary bouts deeply etched into the collective economic memory.

1. What’s Been Driving Inflation?

Around the world, prices have been rising faster than usual as the end of many pandemic-related restrictions released pent-up consumer demand that disrupted supply chains have struggled to meet. Some factors have affected Latin America in particular.

For instance, the global rally of food and energy prices has had a disproportionately large impact on the world’s most unequal region: food prices make up a greater share of inflation indexes in Latin America than in advanced economies like the U.S. That means that soaring food prices — beef is up 43% in Brazil — have played a larger role in overall inflation.

2. Are There Other Factors Specific To Latin America?

Yes. Many countries in the region are also net energy importers, and have seen surging gas prices as rising demand has led to tighter global oil markets. Recent social unrest has triggered volatility in some currencies too. There’s a strong tie between prices and currencies in Latin America, and devaluations almost immediately show up in inflation.

Meanwhile, governments face continued pressure to sustain increased social spending adopted to combat the jump in poverty caused by the pandemic. The prospect of larger deficits has both soured investors on the currency outlook and increased their inflation expectations, which often causes local businesses to raise prices more and workers to demand higher pay increases in the near-term to hedge against future inflation.

All this comes on top of being a region with a history of high inflation: It averaged over 100% annually in the late 1980s and early ‘90s, according to the International Monetary Fund.

3. How Bad Is Inflation And What Have Central Banks Done?

Here’s How Inflation Is Currently Affecting Monetary Policy In Latin America

July Consumer Prices In:

* Brazil: 9% Y/Y (Highest Since 2016)
Central Bank: Four Rate Hikes Since March Totaling 325 Basis Points To 5.25%

* Mexico: 5.8% (Near Highest Since Late 2017)
Central Bank: Two Quarter-Point Hikes To 4.5%

* Chile: 4.5% (Highest Since 2016)
Central Bank: Two Hikes, Including The Largest In Two Decades, Totaling 100 Basis Points To 1.50%

* Peru: 5% (Highest Since 2009)
Central Bank: First Hike In Five Years To 0.5%

* Uruguay: 7.3% (From 10% A Year Ago)
Central Bank: 50 Basis Point Hike To 5%

* Paraguay: 5.6% (Highest Since 2014)
Central Bank: Quarter Point Hike To 1%, The First Increase In More Than Five Years

* Colombia: 4% (Highest Since Late 2017)
Central Bank Signaled It May Soon Raise Rates

4. Why Are The Region’s Central Banks Acting Now?

They’re trying to head off the kind of deterioration in exchange rates that commonly occur in emerging economies when inflation expectations rise. Latin America is already home to four of the six worst performing currencies in emerging markets this year.

They’re also reacting to a stronger-than-expected economic recovery — the region is set to grow this year at the fastest pace since 2009. Then there’s an unsettled political backdrop, with violent protests in Colombia, a new leftist government in Peru and fears that Brazilian President Jair Bolsonaro is working to undermine elections next year.

5. What’s The Benefit Of These Hikes?

In some countries, inflation is running above the central bank’s target range, so cooling prices is also tied to the policy credibility in a region with fragile institutions. Some analysts say raising interest rates will preserve the recovery by anchoring inflation expectations, shoring up credibility and offsetting what some investors perceive as excessive stimulus.

And Wall Street sentiment is critical for Latin America, where sovereign bonds and currencies can plunge overnight at the first whiff of political turmoil or pendulum-swings in economic policy. In countries with political risk, accelerating inflation and economies doing well, “it’s about time that we start to take the foot off the accelerator,” Alberto Ramos, head of Latin America research at Goldman Sachs Group Inc., said.

6. What Are The Risks To Raising Rates In The Region?

Higher interest rates create greater debt burdens and larger fiscal deficits, which in turn can pose a threat to a long-term recovery. Rate hikes are making domestic debt more expensive at a time when the region’s debt load has spiked to the highest levels in 30 years and countries try to reel in Covid spending. That risk plays out in the decisions by central bankers: policy makers have been divided in Mexico, Colombia and Uruguay on whether to raise rates.

A third wave of Covid cases from the delta variant, now circulating in the region, could derail a recovery. “There is some reluctance in the region to have a very strict tightening of monetary policy,” says Alejandro Cuadrado, head of Latin America currency strategy at BBVA in New York. “The transmission channel of monetary policy is weak in most cases.”

7. Why Don’t Rate Increases Have An Immediate Impact In Latin America?

Latin America’s economies are notable for high levels of informal jobs — all-cash, low-wage gigs at companies that typically don’t qualify for loans.

This portion of the labor force — and employers — is expected to grow even more in the recovery from the pandemic, putting more of the economy out of the formal financial system.

And over half the region’s adult population didn’t have a bank account before the pandemic. With so much activity off the books, rate hikes don’t have the immediate impact in Latin America that they often do in the U.S. or Europe.

8. What Are Banks Signaling About The Next Steps?

That more rate increases are on the horizon. Brazil’s central bank already forecasts another 100 basis-point rate hike in September with Colombia following soon after. BBVA’s Cuadrado sees most Latin American central banks continuing to raise rates this year.

The notable exception is Argentina, which doesn’t follow an inflation targeting system, and isn’t planning to boost rates any time soon despite 52% inflation. Policy makers in Buenos Aires worry a rate hike could actually accelerate inflation because higher interest payments would increase the amount of money in circulation.

Updated: 8-24-2021

U.S. Food Suppliers Are Having Trouble Keeping Shelves Stocked

Some of the largest U.S. food distributors are reporting difficulties in fulfilling orders as a lack of workers weighs on the supply chain.

Sysco Corp., North America’s largest wholesale food distributor, is turning away customers in some areas where demand is exceeding capacity. The company also said prices for key goods such as chicken, pork and paper products for takeout packaging are climbing amid tight supplies. In particular, production has slowed for high-demand, labor-intensive cuts like bacon, ribs, wings and tenders, Sysco said.

“There are certain areas across the country that are more challenged by the labor shortage and our volume of orders is regularly exceeding our capacity,” Sysco Chief Executive Officer Kevin Hourican said in a letter to clients earlier this month. “This has, unfortunately, led to service disruptions for some of our customers.”

An analysis from DecaData, which tracks retailer transactions with shoppers and manufacturers, shows that retailers are bumping up against manufacturer capacity as they stockpile ahead of the holiday season. In July, the incidence of suppliers limiting or putting a cap on orders from customers was more than double what it was in January, its data show.

Another major distributor, United Natural Foods Inc., is having trouble getting food to stores on time. The company said the labor shortages, as well as delays for some imported goods like cheese, coconut water and spices, are causing the problems.

“We anticipate additional supplier challenges in the short term with gradual improvement through the fall and winter,” a United Natural Foods representative said. The company’s top priority is to support customers “by working diligently to recover and bring their shelves back to normal inventory levels as quickly as possible.”

U.S. companies across industries are reporting a dearth of workers amid sweetened unemployment benefits, stimulus payments and a pandemic that has reduced the appeal of in-person employment. Houston-based Sysco is aggressively hiring warehouse workers and truck drivers and offering referral and sign-on bonuses along with retention money for current staff.

The entire food sector is seeing “massive labor shortages,” said Benjamin Walker, senior vice president of sales, marketing and merchandising at Baldor Specialty Foods, a New York distributor. “Service levels are the lowest I’ve seen in my 16-year career, and it doesn’t seem like it’s going away anytime soon.”

Finding truck drivers is “next to impossible,” he said, while freight costs are rising daily. The company’s orders are arriving late and consequently facing delays in being sent to customers. On the outbound side, on-time deliveries are still above 50% but have fallen from the usual rate of more than 90%.

“We all thought it would be over by now. It’s just one thing after another,” he said. “This is going to be the norm for a while.”

Updated: 8-25-2021

Brazil Inflation Speeds Up With More Key Rate Hikes In Sight

Brazil’s consumer prices rose more than expected as the central bank readies its fifth straight interest rate hike in efforts to tame above-target inflation.

Prices rose 0.89% in mid-August from a month prior, more than all estimates in a Bloomberg survey that had a 0.83% median forecast. It was the highest mid-month print for August since 2002, the national statistics institute reported on Wednesday. Annual inflation sped up to 9.30%.

The central bank has lifted borrowing costs by 325 basis points this year and signaled it will do so again in September. Consumer prices have been propelled by commodity costs, rising electricity bills and a reopening economy. Recent political tensions are also helping keep 2022 inflation forecasts above target.

What Bloomberg Economics Says:

With headline inflation flirting with double-digits and underlying inflation running hot, Brazil’s central bank remains under pressure to accelerate its move to a tight policy. For now we project it will deliver the 100bps hike pledged in its latest communication, but another upside surprise in the full August inflation print or an unconvincing 2022 budget proposal could prompt the monetary authority to raise the Selic by more and increase the tone in its communication.

— Adriana Dupita, Latin America Economist

Swap rates on the contract due on January 2023, which indicate investors expectations for monetary policy, rose three basis point to 8.45%. It was the most traded in Sao Paulo on Wednesday. The real gained 0.7% to 5.2098 per dollar in late afternoon trading.

Electricity Prices

Higher housing costs, due to a 5% surge in electricity, represented the main driver of this month’s print, rising 1.97% from mid-July. Brazil’s regulated energy price rate has been at its highest level since July due to the most severe drought in decades.

Transportation rose 1.11% due to higher fuel and gas prices, while food increased 1.02%, according to the statistics institute. On the other hand, airplane tickets, which had surged over 35% in the prior month, decreased 10.9%.

Analysts surveyed by the monetary authority have raised both their 2021 and 2022 inflation forecasts for five straight weeks. The central bank targets annual inflation of 3.75% and 3.5% for this year and next, respectively.

President Jair Bolsonaro is growing uneasy about Brazil’s inflation in the run-up to general elections next year, but his complaints about rising prices don’t mean he plans to interfere with the central bank, according to five people close to him including cabinet members.

Updated: 8-25-2021

We Need To Talk About The Great Mayonnaise Inflation Mystery

Mayonnaise is no stranger to controversy. France and Spain have duelled over who can claim credit for the mother of cold sauces. At the same time, the fat-laden filling has been attacked by public health officials, described as the “devil’s condiment,” and criticized as being synonymous with the pedestrian palates of Middle America. At Katz’s Deli in New York, customers are warned to “ask for mayo at your own peril.”

Now mayonnaise is at the heart of a new debate, one that has the potential to be even more divisive than whether or not it deserves to accompany pastrami. As inflation ticks to the highest level in more than a decade, the slimy spread has been caught up in a highly emotive argument over recent price increases and who’s to blame for them.

The great mayoinflation controversy began humbly enough with a local news report focused on the impact of food inflation on nearby restaurants.

“I am paying $200 more a week in mayonnaise,” the owner of The Sherwood, a self-described “neighborhood restaurant” in Winston-Salem, North Carolina, told NBC affiliate WXii earlier this month.

The comment was soon picked up by the official Twitter account of the North Carolina Republican Party, which tweeted the $200 stat with a quip about “Bidenflation.” Soon the tweet was smeared across social media as people pointed out that based on official inflation rates — the Consumer Price Index (CPI) was 5.4% year-on-year in July — the restaurant would have to be going through gallons of the stuff in order to be spending an additional $200 a week.

But The Sherwood is not alone in pointing out the higher cost of mayo. Burger King “can see significant inflation across all regions on protein and oils,” according to one of the company’s internal commodities report from earlier in the year. Meanwhile, Unilever — the owner of the Hellmann’s mayonnaise brand — has also warned that raw material costs are rising sharply.

So just how bad is inflation in the sandwich spread? And what can mayo prices actually tell us about current dynamics behind price increases and how they’re measured?

It’s time to dive in deeper than the filling on an egg salad sandwich.

It might seem natural to reach for the most high-profile inflation measure available when trying to figure out what’s going on with mayo prices.

While the Personal Consumption Expenditures (PCE) Index remains the Federal Reserve’s preferred gauge given its breadth and use of business surveys, CPI tends to grab the headlines since it’s used as the basis for social security payments and inflation-linked Treasuries (TIPs).

The great thing about CPI — and one of the reasons it has does get so much attention from the market — is that it contains dozens of smaller indexes and individual items. So why use headline CPI of 5.4% to measure mayo inflation when you can get something much more granular? You can find mayonnaise as an entry-level item in CPI called “mayonnaise, salad dressing, and sandwich spreads.” That falls into the broader index of “other fats and oils including peanut butter.”

“The index is running at 5.8% year-on-year as of July vs 2.4% last July, but if you look at the chart, it’s seen much bigger spikes in the past,” says Omair Sharif, founder and president of Inflation Insights and an upcoming Odd Lots guest. “Frankly, I’m surprised this restaurant is still in business given the mayo shocks in 2009 and 2012.”

So while mayo prices have been rising since the Covid-19 pandemic, they’ve experienced far more intense rates of change before.

But perhaps the consumer surveys aren’t doing a particularly good job of showing mayonnaise prices. We can try to augment our understanding by using some alternative data. Sites like Keepa.com track the cost of items on Amazon.com, but even they show prices remaining relatively stable for the most popular brands of mayo in recent months.

It’s possible, as one Twitter user pointed out, that the restaurant is using a very specific supplier that may be experiencing idiosyncratic price increases due to specific bottlenecks or shipping issues. But since The Sherwood isn’t the only business to have complained about mayoinflation in recent months, it’s worth taking a look at mayo prices from the viewpoint of a producer rather than a consumer.

Here we have to look at yet another inflation index — the Producer Price Index, or PPI. While CPI looks at costs from the perspective of consumers, the PPI examines prices as experienced by producers.

The PPI manufacturing index for “Mayonnaise, Dressing & Sauce” is currently running at a record 144.6. But since PPI is measured in a very different way to CPI, that 144.6 works out to year-on-year inflation of 2.3% — hardly astronomical and a far cry from the 5.8% figure in CPI. What accounts for the discrepancy?

Here it’s important to point out that we can get even more granular in PPI by stripping out as many non-mayo sauces as possible. The “Mayonnaise, Dressing & Sauce” category includes things like vinegar, cider, prepared dressing and pourable salad dressing — none of which is relevant to the mayoinflation question.

Instead, we can take a look at “Mayonnaise, salad dressings other than pourable, & sandwich spreads” which gets us much closer to a purer gage. That PPI index is running at 143.9, which translates to a year-on-year rate of 4.8%

But we can get more specific than even that PPI item; enter the PPI commodity code. As Sharif explains, the basic difference between industry and commodity codes in PPI, is that the former represents the price received by the industry — in this case those who manufacture mayo — as a whole for their output, while the latter reflects price received for mayo regardless of the industry that produced it.

“It’s just a different classification system,” says Sharif. “Now, I don’t know who else is producing mayo for sale to wholesalers/retailers besides the good folks in the mayo manufacturing industry, but I have a call out to the relevant analyst.” [We will dutifully update if we hear more.]

So finally, we arrive at the PPI commodity index for “mayonnaise, salad dressings and sandwich spreads,” which comes in at 5.45% and correlates well with the 4.8% PPI industry code.

So now that we’ve nailed down the extent of mayoinflation from a variety of indexes, it’s time to ask why prices are increasing at all? Here we come to the dark secret of the light-colored condiment: its main ingredient.

Famous brands of mayonnaise from Kraft to Hellmann’s to Duke’s and Miracle Whip, all list their primary component as the viscous oil made from soybeans. Some might argue that the predominance of soybean oil in mayonnaise means that most of the stuff we buy in jars is very far removed from early conceptions of the condiment, which called for a mixture of olive oil, eggs, salt and garlic or lemon juice. That debate is beyond the scope of this study.

Suffice to say that the amount of soybean oil in mayo means the sauce’s cost is often influenced by the overall fortunes of the soy market, and the price of soybean oil on the Chicago Mercantile Exchange has almost doubled over the past year.

But it’s hard to trace those higher prices to easy monetary policy or a particular presidential administration. Instead, a big driver of soybean oil has been China importing more feed as it rebuilds its pig herd following African Swine Fever and a global shortage of oilseeds that’s been exacerbated by bad weather.

In many ways, higher mayonnaise prices now reflect the confluence of not one but two pandemics. African Swine Fever destroyed as much as a third of China’s pig supply. As the country’s farmers rushed to rebuild hog herds, soybean producers struggled to keep up with the sudden spike in demand for feedstock, which pressured soy prices higher.

Meanwhile, the Covid pandemic and stay-at-home orders helped boost demand for sandwich spreads in the U.S., with Unilever recognizing the condiment’s outstanding contribution to its earnings in the second quarter of last year. Bad weather in South America and Canada has been pressuring soybean oil prices upwards since then.

For now it seems producers are absorbing some of the higher input costs that go into making the miracle that is America’s most popular sandwich spread.

All of which points to a wider point about inflation. We tend to talk about it from a macro perspective, as a cohesive whole. But the measure is ultimately a collection of individual prices, each of which tell their own idiosyncratic story of supply and demand.

Updated: 8-31-2021

Eurozone Inflation Hits Decade High As Bottlenecks Bite

Jump in inflation will test the European Central Bank’s readiness to let the economy run hot.

Inflation in the eurozone hit its highest level in almost a decade in August amid signs that shortages of semiconductors and other important manufacturing components are pushing up the prices paid by consumers.

Broad consumer prices were 3% higher in August than a year earlier, a pickup from the 2.2% rate of inflation recorded in July and the sharpest rise since November 2011.

The European Central Bank aims to keep inflation at 2%, but last month explicitly said it would leave its key interest rate steady if a period of inflation running above that goal appeared likely to be “transitory.”

Inflation rates have picked up around the world in recent months, largely driven by rising energy costs as a rebound in demand proves stronger than oil and other energy producers had anticipated. But there are signs that shortages of key parts such as microprocessors are also pushing consumer prices higher, threatening a lengthier period of stronger inflation.

“Clearly, risks that inflationary pressures prove more sustainable are on the rise,” wrote Fabio Balboni, an economist at HSBC, in a note to clients.

The jump in inflation comes as ECB rate-setters prepare for their next policy announcement on Sept. 9. They have said the leap in inflation is likely to prove to be the temporary result of shortfalls in the supply of a narrow range of goods and services that will ease as economies around the world reopen more fully.

That is a view shared by many U.S. policy makers. Federal Reserve Chairman Jerome Powell reaffirmed Friday the central bank’s plan to begin reversing its easy-money policies later this year and staked out a position that calls for more patience around when to raise rates. U.S. inflation is higher than it is in the eurozone, reflecting the stronger economic recovery.

Economists think ECB policy makers may slightly trim their bond purchases to reflect a strengthening economic recovery, but will otherwise reassure eurozone households and businesses that borrowing costs won’t soon rise.

“We expect that the ECB will continue to communicate that monetary policy will remain loose for long to avoid any premature tightening of financing conditions,” said Silvia Ardagna, an economist at Barclays.

In forecasts to be released next week, the central bank is expected to predict slightly higher inflation this year, but continue to see the pace of price rises slowing in 2022 and 2023, with the inflation rate once again settling below target. That suggests that the central bank may not raise its key interest rate—which has been below zero for more than seven years—until 2024.

ECB policy makers last month overhauled their policy framework to give themselves room to let the economy run hotter than in the past. The eurozone economy suffered a larger drop in output than the U.S. in 2020 and was once again in recession around the turn of the year.

In the second quarter of 2021, the eurozone’s economy was still 3% smaller than it was at the end of 2019, while the U.S. economy had returned to its pre-pandemic size. But the eurozone economy grew faster than its U.S. counterpart in the three months through June and should return to its pre-pandemic size by the end of this year.

ECB policy makers want to aid the recovery by reassuring households and businesses that they won’t repeat the mistakes of a decade ago, when their predecessors raised their key interest rate before the recovery from the global financial crisis had put down deep roots. What followed those rate increases was 18 months of economic contraction and a long period of very low inflation rates.

Now, policy makers believe they are on strong ground in seeing the pickup in inflation as the economy reopens as temporary. Part of the recent acceleration in price rises is down to tax changes in Germany, the eurozone’s largest member. In July 2020, the government there cut value-added tax to aid the economy, but those cuts were reversed at the start of this year. So prices now are being compared with artificially lower prices a year ago, exaggerating the strength of inflationary pressures.

There are risks to the ECB’s new patience. One is that the problems manufacturers are facing in securing raw materials and parts will prove longer lasting than initially anticipated. In a number of Asian countries where many of those parts are made, the spread of the Covid-19 Delta variant is threatening fresh delays.

“It looks like bottlenecks are going to be more persistent than expected,” said ECB chief economist Philip Lane in an interview with Reuters published last week.

The August inflation figures may carry a warning, since they recorded a sharp acceleration in the rate at which prices of manufactured goods are increasing, to 2.7% from just 0.7% in July.

“This could be a sign that rising input prices and supply problems are starting to put some upward pressure on consumer prices,” said Jack Allen-Reynolds, an economist at Capital Economics.

By contrast, prices of services rose by just 1.1% over the year, and energy costs continued to drive much of the pickup in inflation, with prices rising 15.4% over the year, up from 14.3% in July.

The other risk is that eurozone workers will come to expect inflation to settle above the ECB’s inflation target, and demand higher pay rises to compensate. So far, there are few signs that this is happening. According to a survey by the European Commission released Monday, households in August expected prices to rise faster over the coming 12 months than they did in July, but at a pace that remained modest by historic standards.

Updated: 9-3-2021

Goldman Sachs Sees Peru Accelerating Pace of Interest Rate Hikes

Goldman Sachs Group Inc. expects Peru’s central bank to accelerate the pace of interest rate hikes, increasing borrowing costs to 1% next week amid deteriorating inflation expectations and political uncertainty.

The central bank led by Julio Velarde on Sept. 9 is most likely to boost the key rate by 50 basis points, double the pace of its August’s increase, Goldman’s chief Latin America economist Alberto Ramos wrote in a research note. He gives a 20% probability to a milder, 25 basis-point hike and a 15% probability to an increase bigger than 50 bps.

“Inflation expectations deteriorated significantly,” Ramos wrote in the Friday note. “Broad risk management considerations fully justify a faster and more front-loaded monetary policy normalization path.”

Peru lifted its benchmark rate last month by a quarter percentage point to 0.5%, the first increase in five years after inflation accelerated faster than expected and political turmoil with the arrival of the government of President Pedro Castillo sank the currency. Lima consumer prices rose almost 5% in August compared to a year ago, the fastest increase in more than 12 years.

What Every Investor Should Understand About Stagflation—but Often Doesn’t

Many people remember lessons, or think they do, about the 1970s economy. But the comparisons aren’t that simple.

The prospect that inflation’s recent spike may be more than transitory, coupled with the possibility the economy will grow slowly, has raised the specter of the “stagflation” era of 50 years ago.

But be careful about making investment decisions based on what happened in that era—marked by a combination of stagnant growth and higher inflation. While the general outlines of the stagflation era are widely known, there are many misconceptions about how particular asset classes fared.

Many investors equate the decade of the 1970s with stagflation, but it is more precisely defined as lasting from 1966 through 1982, according to Edward McQuarrie, a professor at Santa Clara University’s Leavey School of Business who has reconstructed U.S. stock-market history back to 1793.

“The mid-1960s are when the inflation that we associate with the 1970s actually began, and the ills we associate with the 1970s didn’t end until 1982,” he says.

Over this 17-year period from 1966 through 1982, inflation was much higher than in the postwar period up until then, and real GDP growth was much smaller. The consumer-price index averaged 6.8% annualized, for example, four times the 1.7% rate over the 1947-1965 period. Real GDP grew at just a 2.2% annualized rate between 1966 and 1982, less than half the 4.5% annualized rate over the 1947-1965 period.

All this had an impact on financial markets, but not in the ways some people think. Here are some common misconceptions about the impact on bonds, stocks and commodities.

Bonds

The bond market may be where the greatest misconceptions are centered.

That’s because interest rates skyrocketed along with inflation from 1966 to 1982, and we all “know” that bonds lose value when interest rates rise. In fact, however, intermediate-term Treasurys produced an annualized total return of 7% for the 17 years through the end of 1982, according to data from Ibbotson Associates. They even slightly outperformed inflation.

Bonds can do this well in a rising-rate environment because of the dynamics of so-called bond ladders—portfolios of bonds with a fixed duration target. A bond’s duration is related to the number of years left until it matures; it measures its sensitivity to changes in interest rates.

Most bond mutual funds and exchange-traded bond funds aim to maintain a fairly constant average duration of the bonds they hold, which they achieve by constantly reinvesting in a longer-dated bond the proceeds of ones that have matured. The higher yields of those newly purchased bonds eventually will make up for the capital losses incurred by previously owned bonds.

This means that, if you hold on long enough, you need not fear higher interest rates. Your long-term return from investing in a bond ladder (or typical bond index fund) will be close to its initial yield.

That may provide little solace today, given how low interest rates are. But notice that you would find bonds unattractive not because of the risk of stagflation, but instead because their current yields are so low.

How long must you be willing to hold your bond fund to immunize yourself from higher interest rates? According to a formula derived by Martin Leibowitz, managing director at Morgan Stanley, you must hold it for one year less than twice the fund’s duration target.

This formula helps to explain why long-term Treasurys performed so poorly between 1966 and 1982: Assuming they had an average duration of 20 years, the required holding period would have been 39 years, more than twice as long as the stagflation era.

If your desired holding period is in the neighborhood of 10 to 15 years, therefore, and you want to take advantage of this formula, you must stick with a bond ladder or bond fund with a duration target of around five to seven years. Intermediate-term bonds, in other words.

Stocks

The stock market performed exceptionally poorly in the 1966 to 1982 period. The Dow Jones Industrial Average, for example, first rose above the 1000 level in January 1966, but spent most of the next 16 years below that level. It didn’t rise above 1000 for good until late 1982.

To be sure, stocks’ total return was higher than suggested by the Dow, since dividend yields were much higher in that era than now. The S&P 500, for example, produced an annualized return of 6.8% from 1966 through 1982.

Even so, the S&P 500’s return over this 17-year stretch merely equals inflation and slightly lags behind that of intermediate-term bonds. Prof. McQuarrie says that this period is one of the longest in the U.S. since 1793 “where stocks returned close to nothing in inflation-adjusted terms.”

We need to be careful extrapolating this dismal performance to a future stagflation era, however.

That’s because investors in the 1960s and 1970s may have acted irrationally in believing that inflation made equities less valuable. That at least was the famous argument made in the late 1970s by Franco Modigliani, now deceased, a finance professor at the Massachusetts Institute of Technology who would go on to earn a Nobel Prize in economics in 1985.

He argued that stock-market investors were suffering from “inflation illusion” in failing to understand that stocks are a good long-term inflation hedge.

To be sure, future investors might be equally irrational if and when we enter another period of stagflation. Notice, however, that this is a far different bet than an argument based on companies’ net worth, relying on psychology rather than fundamental balance-sheet analysis.

Commodities

Conventional wisdom teaches us that commodities are the best inflation hedge. But to support this belief, you will need to look elsewhere than their performance during the 1966-1982 period.

That’s because agricultural commodities dominated this asset category in the stagflation era. In the early 1970s, cattle futures represented more than 50% of the S&P GSCI index, one of the most widely followed benchmarks for the performance of commodities. Those who naively extrapolate this index’s returns from those early years to a future stagflation era may be surprised to learn that cattle today represent only about a 5% weight in the index.

In fact, according to Campbell Harvey, a finance professor at Duke University, and Claude Erb, a former commodities fund manager at TCW Group, it isn’t clear we should even view commodities as a coherent asset class. We should instead analyze the inflation-hedging potential of each individual commodity on its own. The researchers found that less than half of commodities they studied were significantly correlated with inflation.

Take gold, which many consider to be the paradigmatic inflation hedge. Bullion did indeed skyrocket in the 1970s, from $35 an ounce when it began to be freely traded in 1971 to over $800 an ounce in 1980. But Prof. Harvey and Mr. Erb argue that gold currently may be significantly overvalued, relative to inflation.

They say gold’s fair value relative to inflation is currently below $1,000 an ounce, compared with the current $1,829. So it wouldn’t be a surprise if gold were to fall in price even if we enter another stagflation era.

Updated: 9-5-2021

Egypt’s Soaring Rates Attract Inflows But Carry Risks, S&P Warns

Egypt must find a way to pay less on its debt if it’s to weather a potential increase in global interest rates, S&P Global Ratings warned in a report on Sunday.

Egypt has the highest differential between its key policy rates and inflation among more than 50 economies tracked by Bloomberg, making its bonds and bills a favorite among international investors hungry for yield. Foreign holdings in the North African nation’s notes stand at more than $28 billion, an important buffer as tourism awaits a full recovery from the coronavirus pandemic.

But the world’s highest real interest rates also come with an elevated fiscal cost and leave Egypt vulnerable to significant outflows if rates in the developed world rise — particularly if the U.S. Federal Reserve tapers its quantitative easing policies faster than expected, S&PGR credit analyst Zahabia Gupta wrote in the report.

“Egypt’s interest-to-revenues ratio and its interest payments as a percentage of GDP are among the highest of all rated sovereigns,” according to Gupta. “A potential path for Egypt to lower its interest bill is to increase investor confidence in its economic model such that investors cut the risk premium they require on Egypt’s government debt.”

Updated: 9-7-2021

Robusta Coffee Extends Rally To Four-Year High On Crop Woes

Robusta coffee climbed to a fresh four-year high and arabica rose on concerns that heat and dryness will further threaten crops in Brazil.

Futures have advanced this year as drought and then frost hit crops in top coffee producer Brazil, while supply worries in Vietnam and Colombia have also supported prices. Dry weather and high temperatures will likely worsen crop stress in Brazil’s arabica regions this week, according to Somar Meteorologia.

“It is still uncertain how much the flowering and crop will suffer from the severe frosting in key arabica-growing areas of Brazil. This is also lending support to the robusta price,” Commerzbank AG analyst Michaela Helbing-Kuhl said by email. Plus, the Covid-19 pandemic “and the container shortage will be hindering shipments from Vietnam for the foreseeable future,” she said.

Robusta rose 1.3% to $2,109 a ton in London, after earlier reaching the highest since August 2017. Arabica gained 1.7% to $1.9635 a pound in New York as the market reopened after Monday’s holiday, snapping a four-session loss.

Colombia’s coffee output in August dropped 16% from a year earlier, the nation’s coffee growers federation said, citing logistics issues.

In other soft commodities, raw sugar fell 0.4% to 19.55 cents a pound, while cocoa advanced 0.6% in New York.

One Stat That Shows The Huge Inflationary Impact Of Used Cars

By now you probably know that used cars saw a huge surge in prices over the last several months, putting significant upward pressure on official inflation gauges. The general contours of the story are well-known. Demand for cars has been off the charts.

The rental-car companies dumped a bunch from their fleets when the pandemic hit, and then had to rush to buy cars back. And the persistent chip shortage has meant that the supply of new cars has been severely crimped.

Last week we published our “Odd Lots” interview with Omair Sharif, a veteran inflation watcher and now the founder of the independent shop Inflation Insights. Sharif takes a bottoms-up approach to measuring and forecasting inflation. Instead of using macro variables, like the unemployment rate or Fed policy, he examines CPI item by item and then adds up all the numbers.

Anyway, as you can read in the transcript, Sharif does a great job showing how the future of CPI will be a push-pull tension between rent prices (which make up a huge share of the overall basket, but which are still moving up slowly) versus used cars (which make up a small share of the basket, but which moved up at blazing speed).

Here’s The Key Part:

Joe: So if we’re talking about something like buying apples or buying milk or buying gasoline, everybody buys those things every day or every week, all the time. With rent, not only do very few people actually sign a new lease every month, but also many of the new leases that people actually sign are with their current landlord. And so they probably don’t get the full market rent because those don’t adjust as fast.

And so, you know, looking at this, OK, this is one of the big questions right now. We know that headline inflation has come down a little bit, used cars seem to have stopped going up. That’s a big factor. But everyone’s like, OK, OER (owner’s equivalent rent) is coming, OER is coming. We see the market rent on some places like Zillow and so forth.

Those are shooting up. Why don’t you sort of just explain the theory, what are you actually seeing in practice when you look at the data and how much is rent and other attempts that the CPI or these indices use to capture shelter, how much upward pressure are they going to put on the measures in the months and years ahead?

Omair: Yeah, so we have seen both of these measures, both rent and OER, actually bottom out over the course of the last several months, and you’re starting to see price increases in the major metro areas. And so even, you know, places like New York, Los Angeles, Chicago, San Francisco, which are still down pretty sharply year over year, it looks like on a monthly basis, they’ve finally kind of begun to stabilize a little bit.

And, you know, it’s important to kind of understand when you talk about the CPI that a lot of these rent indices, what really matters is where these so-called Class A cities, which are, you know, the big ones with populations over two and a half million, what they’re doing.

Because the weights on these cities is incredibly large. So if you looked at just three of them — New York, Los Angeles, Chicago — that is 20% of the entire rent index from just those three metro areas. So where they go matters quite a lot for the overall index, but we are starting to see these places stabilize and move up.

But I think there’s something to keep in mind here about, you know, this whole story about shelters coming, and now we are just going to go up. And so on. Number one, people again are looking at these private market rent data and they’re seeing 7%, 8% growth.

We’ve never seen anything like that in CPI. I’m hard-pressed to think, you know, we’ll see anything like that over, let’s say the course of the next year. Will rent go up? Yes. But, you know, don’t forget before the pandemic, we were running around three and a half percent.

We’re about two and a half percent right now on rent and OER combined. So, you know, even if you move up a full percentage point over the course of the next year, you’ll be kind of right back where you started in early 2020

But let’s assume for a moment that we move up to four and a half percent. So another two percentage points from where we are today. What that basically means is you’re looking at overall core inflation rising by roughly about another 80 basis points. You know, rent’s got about a 40% weight. You go up two percentage points, that’s about 80 bps on the Core CPI.

Now that sounds like a lot, but you mentioned used cars earlier. They’re adding over 130 basis points to the Core CPI right now on a year-over-year basis.

That’s almost certainly going to come off. So even if OER goes up and rent goes up a couple of percentage points over the course of, let’s say the next year, 18 months, that’s almost certainly going to be offset to a great extent by a lot of these things that we’re seeing now that we continue to think of as transitory, but that’s going to offset a lot of the upward pressure you’re going to get from shelter, I think over the course of the next 18 months.

So it’s kind of important to keep that in perspective, because again, four and a half percent is really where we’ve peaked in the past. And even if we get a bit higher than that, you know, year-over-year 40% on used cars is not going to stick. You know, that’s going to potentially more than offset what we see at shelter.

The emphasis in the italicized part is mine. Even if owner’s equivalent rent were to accelerate at a pace that’s well above pre-crisis trends, it still wouldn’t counteract a reversal in the jump we’ve seen from used cars alone.

Updated: 9-10-2021

Charting The Global Economy: Inflation Drumbeat Remains Steady

Price pressures continue to build in developed countries and emerging markets that include those in Latin America, where there are limits to what central bank rate hikes can achieve.

In the U.S., economists are adjusting their inflation forecasts higher and trimming consumer spending and growth projections. A similar trend is playing out in the U.K. as supply chain disruptions hinder factory output.

Natural gas prices are undergoing a historic surge, and it’s bad news for everyone from ceramic makers in China to customers of patisseries in Paris.

Port congestion is worsening during one of the calendar year’s two peak seasons for global shipping demand.

U.S.

The rapid spread of the Covid-19 delta variant, higher inflation and persistent supply challenges are prompting economists to downgrade U.S. growth prospects for the remainder of the year. At the same time, economists raised estimates for the closely followed consumer price index for each quarter through the middle of 2022.

Job openings rose to a fresh record high in July, illustrating the lingering staffing shortages that are making it challenging for businesses to meet demand. After shedding millions of workers from payrolls last year, the rapid snapback in economic activity has left many businesses severely short-staffed.

Europe

The U.K. economy barely grew in July, suggesting the recovery from the coronavirus recession is rapidly leveling off as consumer spending weakens and supply disruptions hamper production.

The European Central Bank’s new staff forecasts showed a stronger near-term outlook for prices and growth in the euro area, though still insufficient to fulfill its mandate. Inflation will average only 1.5% in 2023, below its 2% target.

Europe is heading for a bruising battle over austerity as governments set out their positions on how to address huge debt loads and help their economies work past the deep Covid-19 recession.

Asia

Despite the disruption of the pandemic and political protests of recent years, Hong Kong’s economic growth is expected to catch up with rival financial hub Singapore’s this year for the first time since 2008.

Emerging Markets

When it comes to raising interest rates to cool off pandemic inflation, Latin America’s central banks have been near the front of the global pack. They’re also among the worst-equipped for that task.

Russia’s international reserves jumped to a record $618 billion, boosted by a $17.5 billion inflow from the International Monetary Fund’s global issue of its reserve currency. Amid Western sanctions, President Vladimir Putin has made boosting savings a major priority, controlling spending and salting away revenue from oil exports.

Shortages And Rising Costs Have Reached A Tipping Point For Manufacturers

Late summer doesn’t appear to have been as booming for industrial companies as CEOs and investors had hoped.

It’s a shift from the three months ended in June, when most manufacturers were still riding the recovery, allowing them to boost their guidance even as supply-chain bottlenecks and rising costs curtailed their momentum at the edges.

In fact, of the 24 industrial companies tracked by RBC analyst Deane Dray that provided 2021 outlooks, all but four took a more optimistic view after the June quarter than they did three months earlier.

While no manufacturer would say navigating component shortages and soaring costs was easy, on the whole companies found a way to manage those challenges. This often meant relying on creative workarounds such as rerouting ships or redesigning products.

But those measures could only go so far. A series of updates this week suggests relentless inflation and supply-chain challenges have become too intense to steer around and that these forces will weigh on third-quarter results in a more significant way.

PPG Industries Inc. and Sherwin-Williams Co. both slashed their outlooks for the current quarter this week. The two paint makers have been aggressively raising prices, but commodity, transportation and labor expenses are rising so quickly and sharply that they are struggling to keep up.

PPG said raw-material inflation was trending as much as $70 million higher in the third quarter than what it had anticipated as recently as July.

To help offset the increased costs, Sherwin-Williams announced a 4% surcharge on customers in the Americas through the end of the year, on top of existing “significant” price hikes. While demand is still strong, the companies can’t get the commodities they need to fill customer orders.

In the case of PPG, its own supply chain isn’t the only hurdle; customers are also having to curtail production (and thus paint orders) because of shortages elsewhere, particularly for semiconductors. In total, PPG expects to lose out on as much as $275 million of sales this quarter because of the disruptions.

The same issues are bedeviling homebuilder PulteGroup Inc. and data-center equipment provider Vertiv Holdings Co.; they also cut their outlooks this week because they simply can’t get their hands on enough raw materials.

In some cases, Vertiv can’t procure critical parts “at any price.” (Vertiv also agreed to buy E&I Engineering Ireland Ltd., a maker of electrical switch gear and power distribution systems, for as much as $2 billion, including performance-based payouts.)

General Electric Co. kept its guidance intact but warned this week of “sustained pressure” on revenue and profit margins at its health-care unit because of a limited availability of chips, resins, workers and shipping services. The industrial giant expects the operating environment to stay challenging at least through the first half of 2022.

Supply-chain problems and rising costs aren’t the only pressures. These companies employ thousands of people and require a myriad of ancillary services where inflation pressures are also becoming more notable.

Union Pacific Corp., for example, is facing rising steel and lumber costs to repair and maintain its tracks but its employee health-care bills are also more bloated, as are the prices charged by the janitorial services that clean its office buildings and the contractors that mow its lawns, Chief Executive Officer Lance Fritz said in a video interview with Bloomberg News reporters and editors.

The key question is whether logistics disruptions are simply delaying sales until 2022 or if rising prices will start to turn off some customers. Fastenal Co., a distributor of factory floor odds and ends whose results are often a good bellwether for the broader industry, reported slowing sales growth for the manufacturing sector in the month of August.

Is it just a blip that reflects production challenges and slightly tougher comparisons or something more serious?

Many industrial companies were already in their third round of pandemic price increases as of July, but the cost relief they had hoped for isn’t materializing and pressures are instead getting worse in some categories. “Do you actually go for the fourth price increase?

Because the fact of the matter is, you run the risk of demand destruction in the short term, and that’s not good,” Dover Corp. CEO Richard Tobin said on the company’s latest earnings call in July. I wonder how he feels now. We’ll found out when he presents next Tuesday at the Morgan Stanley Laguna conference alongside a who’s who of the industrial sector. Stay tuned.

Bigger Grain Stockpiles Signal Relief For Global Food Inflation

The U.S. lifted its estimates for stockpiles of the three major crops — corn, soybean, wheat — both on the domestic balance sheet and globally.

The bigger ending-stocks estimates could be good news for consumers. The massive rally in grain prices earlier this year was one of the key factors driving global food inflation.

If bigger supplies help keep prices tamer, food costs could start to stabilize. That would be a big boon to countries that import staple crops like wheat, especially with the pandemic-driven spike in hunger still gripping many poorer regions of the world.

Updated: 9-12-2021

Short-Lasting Inflation Depends On Long-Lasting Goods

The Fed blames rising inflation on an unusual jump in the price of durable products like cars and electronics, which it says won’t last.

For decades, Americans have enjoyed falling prices for cars, electronics and furniture.

Until the Covid-19 pandemic, that is. For the past year, prices for durable goods have been rising—and not just by a little. Whether those prices come back down is a key part of the puzzle facing the Federal Reserve as it plots how to handle an unexpectedly strong burst of inflation.

Federal Reserve Chairman Jerome Powell has argued for a while that the higher inflation is largely driven by temporary factors unique to the pandemic. In a speech hosted by the Federal Reserve Bank of Kansas City in late August, Mr. Powell offered more details on his thinking.

He singled out the sudden rise in durable goods prices—in contrast to the more modest rise in services prices—as evidence that inflation is bound to fall back to the Fed’s 2% goal.

First, a bit of history. Overall consumer prices—which combine services and goods—climbed by an average of 1.8% a year in the past 25 years leading up to the pandemic. That rise was driven by faster-rising costs for services, which grew an average 2.6% a year over that time.

Prices for durable goods—items designed to last at least three years—have done the opposite—falling an average of 1.9% a year between early 1995 and early 2020, according to the Fed’s preferred inflation gauge, the Commerce Department’s price index for personal-consumption expenditures.

Mr. Powell cited several forces driving down prices for durable goods. One is globalization: Competition from other countries, in particular emerging markets with lots of low-wage workers like China and India, has stoked competition for American producers and led some to outsource production. As a result, costs for parts and products have fallen.

Another is technology. New software and more advanced machinery have enabled factories to make products in fewer hours with fewer people, reducing their own costs and ultimately translating into lower prices for consumers. More efficient shipping has also cut costs.

By contrast, prices have persistently risen for services—the bulk of consumer purchases, including haircuts, doctor’s visits and tax preparation. Because they are by default labor intensive—a barber can still only cut one person’s hair at a time—those industries haven’t raised productivity as much as factories.

The pandemic has flipped this dynamic, with durable goods becoming a big driver of inflation. In July, overall consumer prices rose 4.2% from a year earlier, according to the Commerce Department. Prices for durable goods rose 7%. That was twice as fast as the 3.5% gain in prices for services.

Durable goods prices accounted for 1 percentage point of the latest inflation rate, Mr. Powell said. The overall effect of rising durable-goods prices was even larger on “core” inflation, which excludes food and energy prices.

Excluding durable goods, core inflation in the 18 months through June, which smooths out a temporary dip and rebound in some prices during the pandemic, was 2.2%, not far from its 12-year average of 2%, according to the Fed.

What happened? According to Mr. Powell, it’s no mystery: Unique forces caused demand for durable goods to rise far more quickly than supply.

Demand rose for two reasons: The government put a lot of money in the hands of consumers, through multiple stimulus packages. And households, stuck at home and with fewer opportunities to travel, dine out and visit museums, shifted spending toward durable goods, many of which could be delivered with no human contact.

Researchers at the Cleveland Fed found that these two factors—the stimulus and the shift away from services caused by lockdowns—contributed equally to the rise in spending on durable goods.

Households have boosted spending on sofas, cars and kitchen appliances. Businesses, short of workers and caught off guard by the surge in demand, have struggled to ship supplies and make products fast enough. A global chip shortage disrupted shipments of laptops and printers, along with cars. Labor and equipment shortages caused delays of furniture deliveries.

Other figures show the pandemic’s effect on prices that had long experienced deflation. Consider used cars, which are the bulk of all car purchases.

Their prices peaked in 2001, then declined. By February 2020, they had fallen 14% from their all-time high, according to the Labor Department’s consumer-price index, a separate inflation gauge.

Then in the summer of 2020, used-car prices started rising, sharply. In the year through July, they were up a staggering 42%. Of the dozens of major product prices tracked by the Labor Department, only gasoline rose faster.

Computers followed a similar trajectory. Before the pandemic, prices had fallen rapidly for two decades. Then, during the pandemic, they started rising. In June 2020, they rose on an annual basis for the first time ever. In July, they shot up 3.7% from a year earlier.

Or look at furniture. Between January 2000 and January 2020, prices fell 16%. Since February 2020, they have risen 7%.

Mr. Powell argued that once shortages, supply bottlenecks and demand ease, prices will drop, or at least stop rising so steeply.

That may already be happening. Durable goods prices rose just 0.3% in July from a month earlier, down from 1% growth in June and 2% in May. Used-car prices also grew much more modestly, and furniture prices fell for the first time since January.

“As supply problems have begun to resolve, inflation in durable goods other than autos has now slowed and may be starting to fall,” Mr. Powell said in his Kansas City Fed speech. “It seems unlikely that durables inflation will continue to contribute importantly over time to overall inflation.”

He added that he believes the secular forces that had driven down prices for durable goods in the past—globalization and technology—won’t go away.

There are risks that inflationary pressures will be deeper and longer-lasting than Mr. Powell suggests. Gasoline prices—a nondurable good—rose just as fast as used-car prices in the year through July. Food price growth around the globe is accelerating and could persist, JPMorgan Chase said in a note last week.

Services inflation may also pick up. Home prices and rents, one of the largest components of consumption, are rising quickly. Employers in labor-intensive service businesses are facing higher labor costs that they may have to pass along in prices. Also, shipping networks could shift.

Companies could decide to buy parts from other countries, or within the U.S., where labor costs are higher, which could lead to higher prices in the long run.

Mr. Powell’s outlook on durable goods—and, thus, on inflation—is a bet that the world after the pandemic will look largely the same as the world before it.

Updated: 9-13-2021

Bitcoin Eyes US Inflation Report, Potential Dollar Liquidity Squeeze

Bitcoin’s mid-May crash happened after U.S. reported inflation at three-year highs.

Bitcoin’s immediate bullish trajectory has weakened following the last week’s double-digit price drop. The cryptocurrency’s near-term prospects hinge on Tuesday’s U.S. inflation report.

The leading cryptocurrency by market value is trading 3% lower on the day at $44,500, having dropped 11% last week. That was the biggest single-week percentage decline since May.

According to Coinbase Institutional, bitcoin’s immediate bullish outlook has weakened, courtesy of last week’s slide, and the cryptocurrency could consolidate between $44,000 and $48,000 for the time being.

Some chart experts fear a deeper drop as the price structure now looks similar to the one observed after bitcoin’s double-digit slide in the second half of April.

An extended sell-off could materialize if the U.S. consumer price index (CPI) figure for August, scheduled for release at 18:00 UTC on Tuesday, prints above 5% annualized. That could speed up the Federal Reserve’s plans to begin scaling back its liquidity-boosting asset purchases.

Bitcoin’s mid-May slide from $58,000 to $30,000 happened after official data released on May 12 showed the U.S. CPI at a three-year high and triggered taper fears. The sell-off also coincided with China’s crackdown on cryptocurrencies and concerns regarding the negative environmental impact of cryptocurrency mining.

“Inflation remains the key as usual – specifically when base effects will end & CPI prints begin to reflect the true year-on-year picture for the Fed,” QCP Capital said in its Telegram channel. “Arguably, the worst of the base effects have now run its course [as seen in the chart below]. If inflation still remains above 5% from here, the hawks will surely start expressing worry.”

Several Fed members have already turned hawkish, signaling a willingness to begin scaling back asset purchases, or tapering, this year.

Some observers are concerned that a possible taper would lead to a substantial drop in the dollar liquidity in the fourth quarter, and could coincide with the U.S. Treasury issuing more bonds to rebuild its coffers (the Treasury General Account, or TGA) after the debt ceiling is lifted.

According to the Wall Street Journal, the U.S. government could run out of cash and hit the debt ceiling between mid-October and mid-November. The Fed is expected to begin tapering around the same time.

“The U.S. Treasury will likely quickly rebuild the cash balance after a debt ceiling suspension as the new ‘equilibrium level’ of the TGA seems to be around USD 800bn. This is a net liquidity withdrawal of almost USD 600bn compared to the current scenario, which cannot be seen as good news for risk appetite,” analysts at Nordea Bank said in the weekly research note published on Friday.

Bitcoin and other traditional market risk assets have soared in the past 18 months, thanks to the liquidity deluge brought on by the Fed’s stimulus program, and so a liquidity squeeze due to a Fed taper and U.S. Treasury actions could weigh on asset prices in general, and especially on bitcoin because capital in crypto markets is mercenary and tends to overreact, according to Messari’s Mira Christanto.

Top investment banks foresee market risk aversion strengthening in the weeks ahead. According to the Australian Finance Review, Morgan Stanley expects U.S. stocks to decline by as much as 15% by year’s end, while Bank of America foresees a 6% drop.

A stock-market decline could add to bearish pressures around bitcoin. “The world still sees bitcoin as a risk-on asset,” Charles Edwards, founder of Capriole Investments, tweeted. “Almost every bitcoin correction in 2021 has correlated with an S&P500 correction of -2% or more.” The S&P 500 fell by 1.69% last week alongside bitcoin’s 11% decline.

Updated: 9-14-2021

N.Y. Fed Says U.S. Consumers Expect 4% Inflation To Stick Around

Inflation expectations among U.S. consumers over the medium term rose to the highest level on record in the Federal Reserve Bank of New York’s surveys, according to the latest edition published Monday.

Consumers said they expect inflation at 4% over the next three years, up 0.3 percentage point from a month earlier.

The median expectation for the inflation rate in a year’s time also rose by 0.3 percentage point to 5.2% in August, the tenth consecutive monthly increase and a new high in the series, which goes back to 2013.

The Fed survey showed that Americans are expecting higher rates of price increases for items like rent and food that make up a big chunk of the consumer-price basket, and can’t easily be substituted.

Economists surveyed by Bloomberg expect slightly lower rates of inflation. The latest poll, published on Sept. 10, forecast an average increase in prices of 4.3% this year and 3% in 2022.

Meanwhile, expectations that wages will keep pace with the acceleration in prices are starting to cool. The median one-year-ahead expectation for earnings growth dropped 0.4 percentage point to 2.5%, with respondents over the age of 40 largely driving the decline.

Still, overall expectations for household incomes rose by 0.1 percentage point to 3%, a new series high.

Updated: 9-14-2021

General Mills Will Raise Consumer Prices, And McCormick Might, Too

Supply chain, labor shortages and Hurricane Ida are all named as factors.

Grocery budgets will have to be flexible as Credit Suisse analysts turn their attention to food companies and the price hikes that are likely soon.

General Mills Inc. was downgraded to neutral from outperform as higher costs and unexpected labor shortages take a toll. Credit Suisse cut its price target to $63 from $68.

“Our sense is that this will lead to another pricing lag and more margin compression in the back half of [fiscal 2022] when the company’s hedges roll over and the full impact of inflation flows through,” analysts wrote.

Even with these issues analysts say General Mills’ e-commerce and category management are strong and its pet business is an advantage.

General Mills brands include Cheerios cereal, Muir Glen organic foods and Progresso soup.

The company’s shares were up 0.3% in Monday trading; the stock is down 6.2% over the past three months.

Credit Suisse anticipates that McCormick & Co. will also have to raise prices.

“Labor shortages at packaging and ingredients suppliers have increased costs and caused delays,” analysts led by Robert Moskow wrote.

“Similar to TreeHouse Foods, management said that they view labor inflation at their suppliers as a structural issue that is likely to require more price increases for consumers in 2022.”

Treehouse makes private-label food and beverage items for grocers, foodservice providers and others.

McCormick is also feeling the effect of Hurricane Ida, which hit the New Orleans area and, Credit Suisse says, could impact production of the company’s Zatarain’s brand.

Credit Suisse rates McCormick stock outperform with a $100 price target, down from $104.

McCormick stock has tumbled 11% to date in 2021 and is down 4.7% over the past three months.

Key US Inflation Gauge Slips To Slowest Pace In 6 Months, Bitcoin Rises

Core CPI, which excludes energy and food prices, rose 0.1% last month, the slowest pace since February.

The U.S. Labor Department said consumer prices rose 0.3% last month, falling short of the 0.4% increase expected by economists.

The consumer price index rose 5.3% over the past 12 months, below economists’ average prediction of a 5.4% increase. Core CPI, which excludes food and energy prices, rose 0.1% last month, lower than economists’ expectation of 0.3% growth and the slowest increase the U.S. has seen in six months.

Bitcoin’s price rose $690, or 1.5%, to $46,501 since the CPI report was published at 8:30 a.m. ET (12:30 UTC).

The soft inflation report may encourage the U.S. central bank to keep its stimulus program, known as “quantitative easing,” or QE, longer than expected. Many cryptocurrency investors speculate that QE could weaken the dollar, pushing up the value of bitcoin, which has a capped supply.

Bitcoin is also still seen on Wall Street as a speculative asset, and the bet is that more investors will be forced to seek such investments as QE suppresses returns in traditional bond markets.

While August’s lower-than-expected numbers may be regarded as a positive sign for transitory inflation, they could also be a sign of increasing macroeconomic uncertainty as COVID-19 variants fill hospitals even in highly vaccinated countries. Airline fares fell dramatically, and decreasing hotel prices weighed on the shelter index.

”At the margin, the recent data will dampen some of the more excitable inflation forecasts in the markets and at the Fed,” Ian Shepherdson, chief economist for the forecasting firm Pantheon, wrote to clients in an email.

On A Month-Over-Month Basis:

* Used-Vehicles Prices Declined By 1.5%, Continuing July’s Trend Of Supply-Side Inflation Wearing Off, When Prices For Used Autos Increased By Only 0.2%.
* Airline Fares Declined Sharply By 9.1%, Compared With July’s Decrease Of 0.1%.
* Shelter Rose 0.2%, Compared With A 0.4% Increase In July.
* The Food Index Increased By 3.7%, Compared With July’s 0.7% Increase.
* The Energy Index Increased By 2% With The Gasoline Index Rising By 2.8%.

Inflation Eased In August, Though Prices Stayed High

Consumer-price index rose 5.3% from a year before as supplies and labor continued to drive up prices.

Inflation cooled slightly in August but remained strong, as a surge in Covid-19 infections slowed economic growth and pandemic-related shortages of labor and supplies continued to drive up prices.

The Labor Department said last month’s consumer-price index rose a seasonally adjusted 0.3% in August from July, slower than the 0.5% one-month increase in July, and down markedly from June’s 0.9% pace. Prices eased for autos, with used vehicle prices dropping sharply, and hotel rates and airline fares declined in August from July.

The CPI measures what consumers pay for goods and services, including groceries, clothes, restaurant meals, recreation and vehicles. On an annual basis, price pressures eased slightly. The department’s consumer-price index rose 5.3% in August from a year earlier, down from the 5.4% pace in June and July, on an unadjusted basis.

The so-called core price index, which excludes the often volatile categories of food and energy, climbed 4% from a year before, they estimate, compared with 4.3% in July.

Price growth driven by used vehicles eased in August. The recovery of travel-related prices also reversed as the spread of the Delta variant of the Covid-19 virus depressed demand, particularly for travel. Airline fare prices declined 9.1% from July, while rental cars and trucks dropped 8.5%.

“We could see further declines in virus sensitive components in coming months,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, “although lingering supply chain issues will likely produce continued upward pressure on goods prices, including used cars.”

Gasoline prices picked up 2.8% in August from July, a faster pace than the prior month. Restaurant prices rose 0.4%, while grocery prices climbed 0.4%, both categories rising at a slightly slower monthly pace than in July. Among the supermarket items that jumped the most were salad dressing, which increased 4% in August from July, and bacon, up 3.3%.

Inflation is eroding household-spending power despite wage increases in some industries. For the lowest-paid Americans, real wages—adjusted for rising prices—fell 0.5% in August from a year earlier, according to data from the Labor Department and the Atlanta Fed.

Inflation has heated up this year for several reasons. U.S. gross domestic product rose at a rapid 6.6% seasonally adjusted annual rate in the second quarter, fueled by a gush of consumer demand. Spending jumped at an 11.9% pace in the second quarter as more people received vaccinations, businesses reopened and trillions of dollars in federal aid coursed through the economy.

Prices for services hit hardest by the Covid-19 pandemic are still recovering to pre-pandemic levels, including for air travel, accommodation, entertainment and recreation. The outbreak of the Delta variant of the Covid-19 virus likely weakened that rebound, taking some stress off overall price pressures in August, many economists say. At the same time, Delta-driven disruptions due to shutdowns and absenteeism could also worsen supply bottlenecks and shortages.

Many companies are passing on higher labor and materials costs to consumers. The sharp uptick in restaurant prices in the past few months suggests that this pass-through is showing up in the inflation data, say economists. From June through August, fast-food prices rose at an annual rate of 9.7%, according to Labor Department data, which is seasonally adjusted.

“Peak pandemic pressures have likely passed, but significant pressures remain,” said Aichi Amemiya, senior U.S. economist at Nomura Securities.

One prime example is the shortage of semiconductors that has crimped auto production, causing new and used-vehicle prices to soar, which in turn drove up overall CPI throughout the late spring and summer.

However, supply of new autos remains limited, due to the chip shortage and a resurgence of Covid-19 infections in Asia that led to shutdowns of factories and ports, said Mr. Amemiya. While the jump in used-car prices is now easing, prices for new vehicles are still rising, he said.

More broadly, hopes are fading that supply-chain disruptions would pass after a few months.

“I think what we’re learning is that our supply chains were more vulnerable than previously thought and it’s difficult to make a quick turnaround,” said Andrew Schneider, U.S. economist at BNP Paribas.

Jared Simon owns a furniture, mattress and appliance store in the Boston suburb of Franklin, Mass. He has been struggling with shortages, delays and high shipping costs for the past year. Things worsened, however, in August, as absenteeism due to Covid-19 heightened worker shortages among manufacturers and shippers, exacerbating delays.

“I had one factory that almost had to suspend production because they ran out of twine to tie coils together. The twine producer had four people running a production line that normally has 12 employees because they were out with Covid,” he said, noting that a similar thing happened with his cotton supplier.

Another vendor stopped production in late August after it ran out of places to put finished goods due to a backup in shipping.

Mr. Simon said that as his company’s vendors have passed on increased costs, he in turn has passed those on to consumers.

“With shortages, it is easier to pass on increases since consumers need the items right away,” he said.

Economists anticipate that broader, longer-lasting inflationary pressures will emerge in coming quarters. For example, many expect a rebound in rent to buoy overall CPI in the months ahead. Combined, the Labor Department’s various measures of rent make up about one-third of the prices for the CPI’s hypothetical basket of goods and services, and could therefore buoy the overall inflation measure.

Federal Reserve officials are closely watching many inflation measures to gauge whether the recent jump in prices will prove temporary or lasting. Persistent high inflation could compel them to tighten their easy-money policies sooner than expected—or to react more aggressively later—to achieve their 2% average inflation goal.

One factor they watch is consumer expectations of future inflation, which can prove self-fulfilling. Consumers’ median inflation expectation for three years from now leapt to 4% in August, from 3.7% a month earlier, according to a survey by the New York Fed. August’s reading was the highest since the survey began in 2013.

Fed Chairman Jerome Powell in late August reiterated his view that inflation is likely to cool over time, as supply-chain bottlenecks and other effects related to the economy’s reopening subside. So far, there is little evidence that inflation is rising beyond a “relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy,” he said.

The easing of price growth in August on the surface supports Fed analysis that says inflationary pressures could be largely temporary. However, an alternative measure of inflation tracked by the Cleveland Fed suggests a broadening of price pressures.

A consumer-inflation reading that captures price changes in the middle of the index while discarding extreme price changes, known as the 16% trimmed-mean CPI, rose 3.2% in August compared with the same month a year ago, up from 3% in July and well above the 2% average between 2012 and 2019.

The dampening of price pressures in August from July isn’t necessarily a sign that the inflation flare-up of the past few months is dying down for good, said Ms. Rosner-Warburton.

The August CPI report “might be a little bit of a headfake” in signaling that the recent inflation surge is behind us, “but other factors might be moving under the surface,” she said. “There is a growing risk that higher inflation exacerbated by ongoing supply-chain frictions could put a dent in demand next year.”

Updated: 9-15-2021

Commodity Price Surge Spurs Australian Explorers To Get Digging

Australian companies’ spending on resources exploration at home and abroad hit the highest in seven years in the June quarter, spurred by strong price gains across a range of commodities as the global economy recovers from the pandemic.

Explorers listed on the Australian Stock Exchange spent A$666 million ($488 million) in the three months to June 30, according to a study by business advisory firm BDO. That was 34% above the two-year average and the highest quarterly spend since the March quarter of 2014.

BDO said explorers were raising funds at record-breaking levels, which was likely to support a further acceleration in spending to historic highs by the end of the year.

“Initial concerns around Covid-19 and its impact on the exploration sector have been swiftly mitigated by the prompt sector recovery underpinned by strong commodity prices and favorable financial markets,” Sherif Andrawes, BDO’s global head of natural resources, said in a media release.

Still, the industry was being constrained by limited availability of resources, Covid-related travel restrictions and skilled labor shortages, the report said. Australia’s biggest city Sydney was plunged into lockdown at the end of June to try and contain an outbreak of the delta variant, while the country’s international borders have been closed since the pandemic began last year.

Border Blockades Spark Australia’s Biggest Crisis in 120 Years

The 10 biggest spenders in the June quarter included four oil and gas companies, three gold explorers, two nickel miners and one hunting for rare earths.

Updated: 9-15-2021

High Steel Prices Have Manufacturers Scrounging For Supplies

Companies hunt for metal and hire help to find supplies; steel industry says ‘we are producing as much as we can’.

Manufacturers are facing the highest steel and aluminum prices in years, another hurdle for U.S. companies already struggling to make enough cars, cans and other products.

Rapidly increasing metal costs are pushing manufacturers to take what steel they can get and hire more people to seek out available supplies, company executives said. The rising costs are flowing through to some producers of consumer goods: Campbell Soup Co. is paying more to get the cans it fills with tomato soup; Peloton Interactive Inc. is seeing prices rise for parts that go into its stationary bikes; and Steelcase Inc. is paying more to make metal desks and filing cabinets. Car makers like Ford Motor Co. and General Motors Co. are also dealing with rising metal prices.

“It’s crazy for steel,” said Brian Nelson, president of HCC Inc., which sells large metal accessories to tractor manufacturers. “I can’t even get material at times.”

A Midwest steel index calculated by CRU Group estimated prices at $1,940 a ton at the start of September, up from around $560 in September for both 2019 and 2020. A U.S. government index tracking the price of steel and iron nearly doubled in August from the year before, the biggest relative increase since records began in the 1920s.

The higher costs are already hitting consumers, especially for products like cars and appliances. Household appliance prices rose by 6.8% in August, the highest year-over-year increase in a decade, according to Labor Department data.

The rising cost of steel, aluminum and other metals poses another challenge for the $5.9 trillion U.S. manufacturing sector, which has been struggling with a shortage in semiconductor chips, logistics problems and scarce labor.

Manufacturers and trade groups that represent them say steel prices are rising because of high demand for manufactured goods.

Tariffs on imported steel that were implemented by the Trump administration, and continue under the Biden administration, are also contributing to the higher steel prices, said Kip Eideberg, the head of government relations for the Association of Equipment Manufacturers, which represents companies that make farming and construction equipment.

“They could remove the tariffs tomorrow if they wanted to,” Mr. Eideberg said. The Commerce Department didn’t respond to requests for comment.

To keep production running, factories are accepting nonstandard metal sizes, bulking up their supply-chain teams, increasing prices and turning to imports.

“We are having to be flexible to a level we have never been before,” said Richard Dix, the head of supply chain for corn-planter maker Kinze Manufacturing Inc. “If I prefer my steel in 10-foot chunks, I may have to buy it in 12-foot chunks and cut off two for scrap.”

HCC’s Mr. Nelson said he has so far been able to pass along much of the higher steel costs through monthly price increases that his biggest tractor-making customers are accepting.

Even so, he worries that steel costs will keep going up while his customers hit a limit on what they are willing to pay, leaving him stuck between metal suppliers and big tractor producers.

‘We are having to be flexible to a level we have never been before.’
— Richard Dix of Kinze Manufacturing

Steel suppliers, especially ones with extra inventory, have benefited from increasing demand and higher prices. Al Rheinnecker, chairman of supplier American Piping Products Inc., said having a large inventory of pipes, from less than an inch in diameter to 5 feet, has made it easier to supply customers.

Many are willing to pay higher prices to get the specific sizes of metal pipes they want, he said, and some are having to accept what is available.

“They may reluctantly agree to use something they consider a lesser brand,” he said. “They buy the grocery store version of the soda instead of Pepsi or Coke.”

The pipe makers that American Piping Products buys from are taking orders for delivery in nine months, up from around five months normally, Mr. Rheinnecker said.

Steel production in China, which makes more than half the world’s steel, is projected by analysts to decline in the months ahead, partially because of that country’s efforts to cut carbon emissions. Steel buyers said U.S. producers could be doing more to boost production to meet the rising demand, such as restarting idled plants.

United States Steel Corp. said in late July that it had no plans to restart a second blast furnace at its Granite City, Ill., mill that stopped in the spring of 2020.

U.S. Steel and Cleveland-Cliffs Inc., another steelmaker, have taken about 7 million tons of steel production capacity out of service since the pandemic started last year, according to analysts’ calculations. That amounted to about 12% of domestic steel consumption in 2019.

U.S. Steel declined to comment on its current production capacity. Cleveland-Cliffs didn’t respond to requests for comment. The steelmaking capacity that remains idle is costly to restart and particularly vulnerable to new mills now under construction, steel industry analysts said.

About 9 million tons of annual sheet-steel capacity is being added to the U.S. market over the next couple of years. That equates to about 15% of annual domestic sheet-steel consumption.

The new, efficient mills are expected to push down steel prices with their lower operating costs, drawing customers away from older, high-cost mills that need higher steel prices to remain profitable.

The American Iron and Steel Institute said steelmakers are producing at the highest rate since before the financial crisis in 2008. Kevin Dempsey, the Washington, D.C.-based trade group’s chief executive, said steel imports have risen this year, and steel production capacity is expected to increase as more mills come online.

Factories are expanding their supply-chain teams, betting that extra hands will help them get the metals and other products they need more affordably and on time.

Ben Harpenau, chief executive of axle maker Terra Drive Systems Inc., recently spent three hours online trying to find a specific type of bolt because the typical supply was delayed. His company, which normally places steel orders a few months in advance, is now putting in orders for delivery well into next year, trying to ensure a steady supply and locking in current prices to hedge against future increases.

Mr. Harpenau said he recently hired a fourth supply-chain employee to help track delayed orders, monitor price increases and other issues—a hire he said he should have made months ago, given the recent price increases and supply disruptions.

“We believed this was going to be more temporary in nature,” he said.

Prices Remain High. Costco Isn’t The Answer

Inflation may have eased last month, but it’s not time to declare victory. The steps consumers can take to beat sticker shock at the grocery store and beyond.

The most recent data on inflation shows prices rose last month by the smallest amount since January, but that doesn’t mean consumers are in the clear. The debate over whether higher prices will be a temporary phenomenon or here for the long haul continues. In the meantime, shoppers should know there are things they can do to deal with sticker shock.

First, remember that the headline rate – an increase of 0.3% in August from the prior month and 5.3% from a year earlier – is based on the prices of a basket of goods and services a typical consumer buys. But a look at more than 400 items tracked by the Bureau of Labor Statistics shows some prices surged a lot more than others.

The price of rice actually declined and legume lovers will be happy to know lentils also decreased significantly. Apple prices have surged about 6%, but oranges are up only 1%. Instant coffee prices barely budged, while those for roasted coffee rose more than 2%. Adjust your food shopping accordingly.

Think twice about shopping at wholesale stores like Costco. Studies show people just tend to buy more than they actually need rather than save. A more sure-fire way to cut costs when buying groceries is to stay away from foods that have been altered and then repackaged since the process can double the price.

For example, plain tomato sauce is six cents an ounce, but once it’s called spaghetti sauce, it jumps to 20 cents an ounce. Also, remember that inflation can be sneaky – producers may keep the price the same, but reduce the quality or quantity.

When it comes to gas, there aren’t that many ways to beat the 43% price jump over the last year.

But some perspective may help to soften the blow – filling up a car’s tank tends to be a very small percentage of a household’s overall spending. Thanks to inflation, the extra money spent on gas probably totals around $75 a month as of late.

High-end shoppers may want to delay purchases of more discretionary items that have seen the biggest price spikes. That includes designer handbags, with fashion houses such as Chanel and Louis Vuitton increasing prices by almost 20% for certain styles. The same goes for car rentals, with prices soaring 53%, and hotel rooms, which have experienced a 20% increase.

There are things savers can do in the longer term, too, if they’re concerned that high rates of inflation will be here for the foreseeable future and they’re nearing retirement. Maximizing contributions to retirement accounts is even more essential in an inflationary environment.

Dollars won’t go as far once a worker is retired, so it’s better to save more now so that money can be invested and grow for longer. For those with more than $50,000 in a retirement account, it can be helpful to work with a fee-only financial adviser.

It’s also prudent to adjust work and spending habits to collect Social Security as close to age 70 as possible, even though it can start being taken at 62. Social Security payments are doubly beneficial – they’re inflation–indexed and they last a lifetime.

But the sooner you start collecting, the less you’ll get. Let’s say you earn about $70,000 a year and claim a $1,340 monthly benefit at age 62. If you live until 92, you’ll wind up receiving $283,000 in total. But if you waited to start collecting until 70, the monthly benefit would be $3,242 and you would receive $535,000.

Finally, try to keep inflation anxieties in check. Core inflation, which excludes volatile food and energy prices, rose by the smallest amount since February. Still, savvy grocery shopping, maximizing retirement contributions and delaying collecting Social Security are never bad ideas, inflation or not.

Updated: 9-17-2021

Americans See Worst Buying Conditions In Decades On High Prices

U.S. consumer sentiment rose slightly in early September but remained close to a near-decade low, while buying conditions for household durables deteriorated to their worst since 1980 because of high prices.

The University of Michigan’s preliminary sentiment index edged up to 71 from 70.3 in August, data released Friday showed. The figure trailed the median estimate of 72 in a Bloomberg survey of economists.

Buying conditions for household durables, homes and motor vehicles all fell to the lowest in decades. The report said the declines were due to complaints about high prices. Consumers expect inflation to rise 4.7% over the coming year, matching the highest since 2008.

While consumers are more downbeat about the buying climate, they’re still spending. A report Thursday showed retail sales rose unexpectedly in August, with gains across most categories, suggesting steady demand. Because the data aren’t adjusted for price changes, the increase could partly reflect higher prices.

The delta variant of the coronavirus has damped consumer sentiment and led economists to downgrade their forecasts for third-quarter growth as economic activity slows. Concerns about rising prices have also led to a deterioration in confidence in recent months.

“Although declining living standards were still more frequently cited by older, poorer, and less educated households, over the past few months, complaints about rising prices have increased among younger, richer, and more educated households,” Richard Curtin, director of the survey, said in a statement.

The university’s gauge of current conditions fell to 77.1, the lowest since April 2020, from 78.5. A measure of expectations rose to 67.1 from 65.1, according to the survey conducted Aug. 25 to Sept. 12.

While respondents were somewhat more upbeat in early September about the near-term outlook for the economy and their finances, sentiment is weaker than in recent months. Consumers’ longer-term outlook for the economy declined to a decade low, the report showed.

Updated:9-19-2021

Inflation Is All Over The Place

Investors following inflation figures should accept that they can’t extract a reliable signal from the wild swings, and just hope they continue to get lucky.

It is always better to be lucky than right, and for the Federal Reserve and its view that high inflation is transitory, inflation figures lately have brought a big element of luck.

Digging into the numbers shows how easily that luck could go away. If it does, the quiet in markets could be upended.

Closely watched core inflation, which excludes volatile food and energy, was up a mere 0.1% month-on-month in August. With inflation being the single most important indicator for investors at the moment, this looked like good news.

Unfortunately it is a way too optimistic reading. It was a fluke that inflation calmed down in August, and it could equally well pick up again.

True, there was support for the “transitory” crowd. The single-biggest price distortion from the pandemic recovery went into reverse, and second-hand car prices fell 1.5% in the month.

So-called “sticky” prices, which are changed less frequently than others and so seen by economists as a better guide to corporate views of future inflation, rose less. The Atlanta Fed’s measure of sticky prices was up 2.6% annualized in August, down from above 5% in April.

Inflation was also held down by a retreat from travel as the Delta variant of Covid-19 reasserted itself. The cost of airfares and hotels plunged, with airfares down 9.1% month-on-month, the biggest fall since data began in 1989, aside from March and April last year.

The deep problem for investors is to tell apart inflation due to temporary effects on particular sectors and inflation due to easy monetary policy and government support. It is only the second, a sort of deep-core inflation, that really matters to the Fed—and there is no sure way to split out the impact.

In the near future we might see travel resume and airline-ticket prices recover, contributing to inflation again, because prices are still almost 20% below their pre-pandemic levels.

Strip out vehicles and these pandemic-hit services and core inflation picked up in August from July, according to the president’s Council of Economic Advisers.

It isn’t just large sectors such as airlines, either. Some small areas of spending had huge price moves, showing how deep pandemic-related swings go. Men’s suits were written off as history by the switch to working from home. But there was a distinct return-to-the-office vibe last month, as prices leapt 7.9% from July. Last year suits fell to the cheapest since at least 1978. Curtains seem to be in demand too: Prices soared by the most ever last month.

Across the 300 or so separate categories that the Bureau of Labor Statistics tracks, there were more with big rises and more with big falls in August than in July. The median price fell slightly, but when there are so many areas with prices moving a lot, this doesn’t pick out the signal.

Fed Chairman Jerome Powell said at Jackson Hole last month the Fed was using a measure that strips out extreme price moves to try to get to the true underlying rate. This doesn’t really work, either, as so much depends on the definition of “extreme.”

Mr. Powell used a gauge from the Dallas Fed that throws out the top 31% and bottom 24% of personal consumption expenditure (PCE) price changes, and was bang on the Fed’s 2% year-over-year target in July, the latest available.

An alternative measure from the Cleveland Fed strips out the top and bottom 16% of consumer-price index changes, and was far higher; worse, the monthly rate was unchanged in August from July, giving no support to the idea that inflation is already coming back down.

For now investors continue to think both that inflation is transitory, and that it is less transitory than the Fed hopes. For the long term, break-even consumer-price inflation from the Treasury market for the five years starting in five years’ time is at 2.2%, which would be well within the Fed’s 2% target on the alternative PCE measure.

In the near term investors rightly think there is a good chance of inflation staying high for longer than the Fed expects. The options market puts a 39% chance of inflation coming in above 3% over the next five years, according to calculations by the Minneapolis Fed, about where it has been for months. And inflation swaps for the next two years are at 3%.

In my view, the market is complacent about the long run, as domestic politics, geopolitics and demographics are all adding inflation pressure, although it is true that technology may continue to be disinflationary.

In the short term, I think the market’s correct: Inflation will probably calm down as supply chains and travel return to normal, but there is a decent chance that it takes much longer than the Fed hopes. A risk also exists that consumers and workers start to think higher inflation is normal, a self-fulfilling prophecy that would push the Fed to tighten policy earlier.

For now investors following the inflation figures should accept that they can’t extract a reliable signal from the wild swings, and just hope they continue to get lucky.

Updated: 9-20-2021

Data Doesn’t Show Bitcoin As An Inflation Hedge At Present, According To Chainalysis

However, the lack of statistical correlation between inflation and crypto prices has not deterred many investors from viewing the asset in this way.

Data from blockchain analytics firm Chainalysis suggests that Bitcoin (BTC) may not be the hedge against inflation that many seem to believe it is.

“Right now, we can’t show a statistically significant correlation between inflation in the US and Bitcoin prices, but we know anecdotally that many people invest in Bitcoin as a hedge against inflation,” Chainalysis’ head of research, Kim Grauer, told Cointelegraph on Aug. 31 when asked about her thoughts on current inflation in the United States and its impact on Bitcoin.

U.S. inflation has been a hot topic over the past year or two. Back in June, reports showed that inflation in the U.S. was reaching levels unseen in over a decade.

Other countries have experienced much worse inflation than that seen in the United States. Venezuela, for example, saw 10,000,000% inflation in 2019. Interest in digital assets grew in tandem.

“We also know that in other countries that suffer from more severe currency inflation or devaluation like Venezuela and Nigeria, people use cryptocurrencies as a store of value,” Grauer added.

Bitcoin is often described as a store of value asset in the crypto industry even though logically, events such as the price crash earlier in 2021 call that narrative into question.

Brazil Analysts Raise Key Rate Forecasts For Third Straight Week

Brazil analysts raised their benchmark interest rate forecasts for this year and next ahead of Wednesday’s central bank monetary policy decision.

Policy makers led by Roberto Campos Neto will lift the benchmark Selic to 8.25% at the end of this year, above the previous estimate of 8%, according to a central bank survey published on Monday. Their forecast for the interest rate in 2022 was also raised to 8.5% from 8%. It’s the third straight week analysts have lifted those projections.

Brazil’s annual inflation hit 9.68% in August, well above this year’s 3.75% target. A severe drought is draining water reserves, forcing the government to increase electricity rates. Political tensions are still worrying markets, as the government seeks to exclude court-mandated payments from the spending cap rule and help create budget room to strengthen social programs.

In the survey, analysts raised their estimates for year-end inflation for the 24th straight week, to 8.35%. Estimates for 2022, which are a key focus for central bankers, now stand at 4.10%, marking the ninth straight increase.

Last week the government lifted its inflation estimate for this year to 7.9% from 5.9%, and to 3.75% in 2022 from 3.5% previously.

Central bankers are expected to deliver their second consecutive full percentage point rate hike this Wednesday, taking the Selic to 6.25%.

Updated: 9-21-2021

Bank of Spain Sees Inflation Spike Transitory, Peaking Soon

The Bank of Spain expects inflation to peak in November before easing back below the European Central Bank 2% target next year.

The central bank raised its forecasts to 2.1% in 2021 and 1.7% in 2022 from a previous 1.9% and 1.2% respectively. The spike in inflation, driven mostly by record high electricity prices, will likely be transitory, although the bank didn’t rule out more entrenched price pressures stemming from demands for steeper wage hikes.

“Without any news shocks the expectation is for inflation to reach its maximum level around November,” the central bank’s chief economist, Oscar Arce, said in a presentation in Madrid. “From there the base effect will work in the opposite direction.”

Price pressures are weighing on policy makers, with several ECB rate setters signaling in recent days that they see euro-area inflation potentially exceeding forecasts as the economy recovers and supply bottlenecks drive up input prices. The OECD warned earlier on Tuesday that global central banks need to set out clear strategies for coping with inflation risks.

The Bank of Spain also adjusted its economic growth outlook for this year as the relaxation of pandemic restrictions fired up private consumption in the euro area’s fourth-biggest economy.

A pick up in the tourism industry during the summer coupled with fiscal and monetary stimulus contributed to the upward revision of its baseline scenario for GDP in 2021 to a 6.3% expansion, 0.1 percentage points higher than its previous prediction. The institution also raised its forecasts for 2022 and 2023.

The stronger-than-expected rebound in activity in the second quarter will likely propel the economy back to pre-pandemic growth levels by around mid-2022 after experiencing the euro-area’s deepest contraction last year. Although the pace of activity will remain strong in the third quarter the expansion will lose some steam in coming quarters as consumers’ savings dwindle and supply bottlenecks continue.

Lebanon’s Inflation Rises To Highest Globally As Crisis Deepens (#GotBitcoin)

Lebanon’s annual rate of inflation has risen to the highest of all countries tracked by Bloomberg, surpassing Zimbabwe and Venezuela, as the financial meltdown in the Middle East nation worsens.

The consumer price index rose 137.8% from a year earlier in August, compared with 123.4% in July, according to the Lebanon Central Administration of Statistics. Consumer prices rose 10.25% from a month earlier while food prices rose 20.82%.

Lebanon’s inflation has skyrocketed in the past two years as the country’s financial and economic crisis spirals out of control, with politicians doing very little to mitigate its impact. The currency has lost nearly 90% of its value and plunged three quarters of residents into poverty.

Authorities have in recent months started reducing subsidies, as most items are now priced a the black market exchange rate. The central bank is running out of cash and has repeatedly warned the government about continuing subsidies.

After nearly 13 months of paralysis, billionaire and former premier Najib Mikati formed a new government that seeks to resume stalled bailout talks with the International Monetary Fund and creditors to restructure the debt. Lebanon defaulted on $30 billion of Eurobonds last year.

Hungary Taps Brakes On EU’s Most Aggressive Rate-Hike Campaign

Hungary slowed the European Union’s most aggressive interest-rate-hike campaign and pledged to deliver smaller monthly increases to balance surging inflation with the fallout from the latest wave of the global pandemic.

The central bank increased the benchmark rate by 15 basis points to 1.65%, halving the magnitude of 30 basis-points hikes in each of the past three months. It was also less than the quarter-point increase economists expected.

Rate-setters stuck to their pledge to continue monetary tightening until the inflation outlook stabilized around the central bank’s target. The size of the increase was “indicative” of the monthly steps to come until December, when policy makers will make a quarterly assessment of their impact, Deputy Governor Barnabas Virag said after the decision.

While new inflation forecasts published after the decision confirmed that price pressures were on the rise, the central bank said it was now also vigilant about the threat of a new Covid wave undermining the economic recovery.

“These point toward the need to continue the interest-rate-tightening cycle in smaller, monthly steps,” the Monetary Council said in its post-decision statement.

“These point toward the need to continue the interest-rate-tightening cycle in smaller, monthly steps,” the Monetary Council said in its post-decision statement.

The monetary-policy adjustment was welcome news for Prime Minister Viktor Orban, an ally of central bank Governor Gyorgy Matolcsy, who is counting on a robust recovery to deliver him a fourth consecutive term in next year’s parliamentary election.

The premier, who’s rolled back democratic freedoms during more than a decade at the helm of the EU member state, confirmed a plan on Monday to raise the minimum wage by a fifth and to pour 600 billion forint ($2 billion) into tax refunds for parents starting in February to help sway the vote in his favor.

The central bank also continued tapering its government bond purchases for a second month, reducing the weekly target to 40 billion forint ($133 million) from 50 billion forint. The new target will be in place until the December review.

In another tightening move, the central bank also pledged to cut forint liquidity by phasing out central bank swap tenders in the local currency.

Updated: 9-23-2021

Fed Officials See ‘Transitory’ Inflation Lasting Quite A While

The outlook from central-bank policy makers is speeding up plans to raise interest rates.

All year the Federal Reserve’s message on inflation has been consistent: This year’s surge is transitory, and inflation will soon return close to the central bank’s 2% target.

Yet look more closely, and it is clear officials are turning less sanguine—and that explains growing eagerness to start raising interest rates.

Last September, long before the supply bottlenecks emerged, the median forecast by Fed officials was for core inflation (which excludes food and energy) in 2022 of 1.8%. Every few months since then they have nudged that up, and in the forecasts released Wednesday they see core inflation next year at 2.3%.

While current-year forecasts get pushed around a lot by temporary factors such as a jump in oil prices, the next-year forecast reflects where inflation is expected to settle once temporary factors recede. The message from the Fed’s latest projections is that “transitory” is lasting an awfully long time.

Indeed, next year’s projected 2.3% is the highest next-year core inflation forecast since projections were first published in 2007, according to Derek Tang of Monetary Policy Analytics.

This might explain why the Fed is accelerating plans to raise interest rates. The Fed is now buying $120 billion a month in bonds and wants that to fall to zero before it starts to raise rates. On Wednesday, the Fed signaled it would likely start tapering those bond purchases in November, which means the process would be over by mid-2022, clearing the way for a rate increase.

Half of Fed officials think rates will start rising by late next year. Just last March, a majority of officials didn’t see that happening until 2024.

What changed? It isn’t because the economic outlook is stronger. In fact, officials now see slower growth and higher unemployment than they did in March. Chairman Jerome Powell explained that some officials simply wanted more confidence the expected recovery would materialize. But inflation risks clearly play a part.

A 2.3% inflation rate isn’t a big deal. Indeed, it would conform pretty closely to the Fed’s new goal of letting inflation run above 2% for a while to compensate for the many years it ran below 2%. Yet if officials are wrong, they are likely to have proved too low in their forecasts. With unemployment expected to fall to 3.8% by next year and 3.5% by 2023, the economy will be operating with little or no spare capacity, conditions that typically cause inflation to rise.

Fed officials think inflation risks are to the upside; a majority said so Wednesday. Six of 18 Federal Open Market Committee participants think core inflation will be 2.5% or higher next year.

If the Fed is more worried about inflation, investors aren’t. Long-term bond yields dropped a bit Wednesday, and bond-implied future inflation rates haven’t changed much since May. The market might have more faith in the Fed’s “transitory” story than the Fed itself.

Updated: 9-23-2021

Pound, U.K. Yields Rise As Traders Lift Bets On BOE Rate Hike

The pound and U.K. bond yields rose in tandem as the Bank of England’s comments on a stronger case for tightening prompted traders to bring forward their expectations for a rate hike.

Sterling rose as much as 0.7% to the day’s high of $1.3714, while the 10-year yield climbed five basis points to 0.85%. Traders now see the BOE raising rates by 15 basis points to 0.25% in February 2022, having priced it for May before Thursday’s meeting.

They now also expect a further quarter-of-a-percentage-point rise to 0.5% in August next year, compared with November previously. That came as two BOE officials dissented to vote for a reduction in bond purchases, showing a growing push to reduce pandemic-era stimulus.

“The 7-2 vote is the beginning of a shift toward higher rates and boosts the chances that QE ends earlier than expected,” said Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho Bank. “The text comments are looking more hawkish in my mind. We should continue to see further pound strength across the board and an increase in the chance of rate hikes.”

While the central bank traditionally shifts its key interest rate by multiples of 25 basis points, it last cut rates by 15 basis points in March 2020, at the height of the coronavirus pandemic. If officials wanted to raise rates, a move back to 0.25% is seen by strategists as the likely first step.

Updated: 9-23-2021

BOE Opens The Door For 2021 Rate Hike As Inflation Seen Above 4%

The Bank of England raised the prospect of hiking interest rates as soon as November to contain a surge in inflation, which it now expects will exceed 4% following a spike in energy prices.

Noting the “modest tightening” in policy foreseen over its forecast horizon in August, “some developments during the intervening period appear to have strengthened that case, although considerable uncertainties remain,” the Monetary Policy Committee said in a statement on Thursday.

The central bank also agreed that any future tightening should start with an interest-rate increase, even if that “became appropriate” before its bond-buying program finishes around the end of the year. Two of the nine MPC members pushed to end those purchases early, with Dave Ramsden making his first dissenting vote in in four years on the panel.

“This appears to open the door to a rate rise by the end of this year, even while the BOE is injecting net stimulus into the economy via” quantitative easing, said Liz Martins, a senior economist at HSBC Holdings Plc in London. “The MPC does not want to rule out swift tightening if inflationary pressures intensify further.”

The next MPC meeting is set for Nov. 4.

The pound rallied and government bonds fell as investors reacted to a decision that puts the BOE in the more hawkish camp of advanced-world central banks in a pivotal week. On Wednesday, the U.S. Federal Reserve announced that officials may taper bond buying soon, and Norway raised its interest rate on Thursday.

The U.K. central bank is trying to tame inflation that accelerated well beyond its forecasts over the summer, reaching 3.2% last month. Its new focus is enabled by stronger-than-expected jobs data that show unemployment will peak well below worst-case scenarios predicted at the onset of the pandemic.

While the BOE targets inflation of 2%, officials said the rate may temporarily exceed 4% in the final three months of the year. That’s slightly more than predicted in August.

Spiking gas costs that have caused turmoil in U.K. energy markets “could represent a significant upside risk,” and also mean that consumer-price increases double the target until the second quarter of 2022, the MPC added.

Allan Monks, an economist at JPMorgan Chase & Co., said the tone of the statement was more “hawkish than expected,” with policy makers attaching little weight to recent disappointing growth data.

Signaling it could raise rates even before bond purchases expire the committee also appears to be “creating space to potentially hike as soon as November or December, something which we have previously attached a low probability to,” he said.

Allan Monks, an economist at JPMorgan Chase & Co., said the tone of the statement was more “hawkish than expected,” with policy makers attaching little weight to recent disappointing growth data.

Signaling it could raise rates even before bond purchases expire the committee also appears to be “creating space to potentially hike as soon as November or December, something which we have previously attached a low probability to,” he said.

Traders now are pricing a 15-basis-point rate increase in February, compared with May previously. The pound rallied as much as 0.7%, while 10-year gilt yields rose by the most in a week.

The BOE kept its own benchmark unchanged at a record-low 0.1%, while its stock of asset purchases is set to total 895 billion pounds ($1.2 trillion) by the end of this year in line with expectations. Deputy Governor Ramsden joined Michael Saunders in pushing to end bond purchases as soon as possible.

“There was increasing evidence from a range of global and domestic cost and price indicators that inflationary pressures were likely to persist,” the minutes said. “These members judged that, with the existing policy stance, inflation was likely to remain above the 2% target in the medium term.”

The decision was also notable for the participation of the MPC’s two newest members, who both voted with the majority on this occassion. Huw Pill, a former Goldman Sachs Group Inc. analyst, replaced Andy Haldane as chief economist, and Catherine Mann, a one-time chief economist of the OECD, took up a post vacated by Gertjan Vlieghe.

While the BOE’s more hawkish rhetoric follows a noticeable spike in inflation, it also comes against the backdrop of an economic recovery that has shown signs of losing steam amid supply bottlenecks and labor shortages.

Data released on Thursday showed the U.K. had about 5.8% of its workforce on furlough at the start of this month even though that support program is set to expire Sept. 30. September is also shaping up to be the weakest month for private-sector activity since the height of the winter lockdown, IHS Markit said on Thursday.

“Based on the macro numbers, I don’t understand how the U.K. can justify being first for a hike,” said Fabrice Montagne, an economist at Barclays Plc. “The U.S. and Europe are ahead in terms of recovery. We might get a hike but it will be a very painful hike to deliver.”

Updated: 9-25-2021

Turkey To Inspect Price Hikes At Top Five Grocery Chains

Turkish Trade Ministry officials will inspect price increases at five of the country’s biggest grocery chains, days after Turkish President Recep Tayyip Erdogan blamed the nation’s top supermarkets for a surge in food prices.

Trade Minister Mehmet Mus ordered officials to inspect the prices of goods including eggs, milk, vegetables and cleaning supplies at the five chains, state news agency Anadolu reported, citing a Trade Ministry statement.

The price increases at the five chains “disrupts entire markets,” Erdogan said this week. He also pledged that his government would bring surging prices under control and blamed “opportunists” for rampant cost increases.

The share prices of Turkey’s biggest public grocery chains fell sharply on Friday after Erdogan’s comments. BIM Birlesik Magazalar AS, nation’s biggest grocery chain in terms of market cap, dropped 2%, while second biggest Sok Marketler Ticaret AS sank 3.2% on Friday. Migros Ticaret AS and CarrefourSA Ticaret Merkezi AS declined 3.9% and 3%, respectively.

The inflation rate rose to 19.3% in August and many Turks are complaining of high prices for essential items including food, rent and electricity. Even with the jump in prices, Turkey’s central bank cut its benchmark interest rate Thursday by 100 basis points to 18%, saying its monetary policy would be based on core inflation, which excludes food and energy prices.

Turkey Rate Shock Imperils Reserves, Hurts Credibility

Turkish central bank Governor Sahap Kavcioglu’s unexpected interest-rate cut has damaged his credibility and fueled concerns over further weakness in the lira, according to strategists and analysts.

“Today’s move will have destroyed the credibility that Mr. Kavcioglu had built up over the past six months,” said Jason Tuvey, senior emerging-market economist at Capital Economics. The Monetary Policy Committee reduced its key one-week repo rate by 100 basis points to 18%. Only one of the 23 economists surveyed by Bloomberg anticipated a cut, predicting a reduction of 50 basis points.

The rate cut sent the lira to a record low against the dollar and made it the worst-performing emerging-market currency this year. The yield on 10-year government bonds soared by the most since March 22, when the ouster of the central bank’s former investor-friendly governor triggered a selloff in the country’s assets.

Here’s What Some Market Watchers Are Saying About Thursday’s Decision:

Jason Tuvey (Capital Economics):

“Mr. Kavcioglu will have been well aware of what happened to previous CBRT governors that defied President Erdogan’s desire for rate cuts and may have moved on policy to save his job.”

“Additional aggressive easing lies in store over the next year.”

Ima Sammani (Monex Europe):

“Today’s decision is a large concern for the CBRT’s credibility, and the lira’s price action is telling of this. USDTRY pair looks vulnerable with the 9 level being the next breakthrough in the coming weeks.”

“This becomes especially relevant when inflation continues to print higher in September, while negative real rates are a realistic prospect for the medium-term as well if the TRY depreciation filters through to inflation and the Turkish economy’s structural price growth in turn snowballs into an even weaker lira.”

Piotr Matys (InTouch Capital):

“The CBRT may try to impose its view on the market and cut rates further in the coming months, but it’s unlikely to work, as the sharp spike higher in USDTRY illustrates.”

“If the selling pressure on the lira prevails, the central bank may start burning FX reserves to offset the negative impact of lower interest rates. When reserves fall to dangerously low levels — in tandem with interest rates — the CBRT may opt to stabilize the lira with a rate hike. We’ve seen this before and it always ends in the same way.”

Per Hammarlund (Skandinaviska Enskilda Banken AB):

Following a sharp slowdown in money supply and credit growth, “inflation was likely to come down as a result later this year or early next year. Now they risk throwing it all away by cutting prematurely.”

Updated: 9-25-2021

Inflation Menace In Latin America Triggers More Hiking

Latin America’s fight against spiraling consumer prices is likely to shift to a new front this week, with Colombia set to become the region’s fifth major economy under an inflation-targeting regime to tighten monetary policy.

The central bank in Bogota is all but certain to join peers on Thursday and deliver its first hike in half a decade. Around the same time, Banco de Mexico is likely to raise for a third straight meeting after mid-month inflation jumped.

Long a menace to the region, inflation tumbled in Latin America last year as the coronavirus ravaged demand and output, prompting central banks to aggressively slash interest rates. At one point in 2020, annual consumer-price increases in all five economies were under 3%, and as late as the fourth quarter, all were within or under the target range.

Now, with the pandemic easing and economies reopening, inflation has surged once again, forcing policy makers in Brazil, Chile, Mexico and Peru to rapidly reverse course and begin tightening cycles.

Brazil’s central bank, which was first to react, is farthest along. It’s pushed up the Selic rate by 425 basis points from a record-low 2% to 6.25%, most recently with a full-point hike. Chile and Peru both raised at each of their last two meetings, with more moves sure to come.

Rate decisions in Latin America are among at least 12 scheduled around the world in the coming week. A new leader in Japan, the German election outcome, multiple appearances by Group of Seven central bankers, and a further acceleration in euro-zone consumer-price growth will also be among the highlights.

What Bloomberg Economics Says:

“A run of inflation readings for September in the euro area will almost certainly raise alarm bells next week. Prices are accelerating fast and surging energy costs and supply bottlenecks will only add to the pain.”

Updated: 9-28-2021

Inflation And Supply Shortages Are Waking Up The Bond Bears

Debt yields are rising, along with concerns about faster inflation.

Central bankers continue to insist that the recent price pressures that are driving inflation higher will prove temporary. But based on what’s happening to bond yields and in the inflation swaps market, investors are growing less convinced. Something’s got to give.

Supply chain disruptions, soaring energy prices and a rebound in consumer demand thanks to progress with vaccinations have conspired to bestir prices. Annual inflation is running at 5.3% in the U.S. and 3.2% in the U.K., and is forecast to have reached 3.3% in the euro zone. In all three regions, prices are rising at a pace way faster than the 2% central banks are supposed to target.

That’s awakened the animal spirits of the bond bears, who’ve driven benchmark yields higher in the past few weeks.

A Wild Month

Benchmark 10-Year Yields Have Surged In The Past Four Weeks

  But the guardians of monetary stability remain unperturbed by prices rising higher. “These effects have been larger and longer-lasting than anticipated, but they will abate,” Federal Reserve Chairman Jerome Powell said in testimony to the Senate Banking Committee released Monday.

“Our view is that the price pressures will be transient,” Bank of England Governor Andrew Bailey said in a speech the same day.

“The key challenge is to ensure that we do not overreact to transitory supply shocks,” European Central Bank President Christine Lagarde said Tuesday.

While Their Persistence Can Be Debated, There’s No Question That Cost Constraints Are Widespread. A Few Examples:

* FedEx Corp. said last week that there’s been no easing of a labor shortage that’s driving up costs for the delivery company, with one sorting hub suffering understaffing of 35%.

* A survey by the U.K. Office for National Statistics showed 40% of Brits said there was less variety than usual in shops, with 25% saying they hadn’t been able to find non-essential foodstuffs and 18% saying they couldn’t buy essential food items.

* Costco Wholesale Corp. imposed rations on toilet paper, paper towels and cleaning supplies amid experiencing delivery delays.

* A.P. Moller-Maersk A/S has raised its profit guidance three times in five months. The world’s largest shipping line is on track to post annual earnings of $16.2 billion for 2021 — equal to its combined profit in the past nine years, Bloomberg News reported last week.

* Cotton, used in everything from jeans to T-shirts, is trading at its highest price in a decade.

* Nike Corp. said it used to take 40 days to ship sporting apparel across the world; now, that’s taking 80 days, with the rising cost of ocean freight hurting margins.

Consumers are most likely to feel the pinch in the supermarket, where inclement weather in one of the biggest crop growers is also contributing to higher prices. Brazil contributes four-fifths of the world’s orange juice exports, 50% of its sugar exports and 30% of its coffee exports.

This year, the nation suffered its worst drought in a century, followed by freezing conditions that left farms shivering under blankets of frost that crippled crops, Bloomberg News reported this week.

That helps explain why the United Nations world food price index has climbed by a third in the past year, and why the cost of breakfast staples has surged in recent months.

In financial markets, a key set of gauges used by central bankers points to a further acceleration in prices. The five-year forward inflation swaps rates in dollars, sterling and euros have all surged this year, with the euro zone rate climbing to its highest in more than six years and the U.K. level reaching a decade high.

Perhaps the most troublesome aspect of the current economic environment is the risk that inflation is accelerating at the same time that growth is stumbling. The danger of stagflation seems to be making its way onto the collective radar of traders and investors; Bloomberg’s News Trends function, which can tally the occurrence of keywords from more than 1,500 sources, shows monthly usage of the term is at a record high.

Of course, fixed-income bears have been burned before. The years following the global financial crisis have seen repeated warnings that unprecedented economic stimulus would unleash inflation, only for prices to fail to rise and bond yields to continue to plumb new depths.

Time will tell who’s right this time — the central bankers insisting that the current increases in consumer prices are transitory, or the bond vigilantes seeing danger ahead.

Updated: 9-29-2021

Argentina Accelerates Money Printing Ahead of November Elections

Argentina’s central bank has stepped up the pace of money printing to fund government spending ahead of November’s midterm elections, potentially stoking inflation in the months ahead.

Central bank financing of the government reached 250 billion pesos ($2.5 billion) in the first 22 days of September, the most of any month this year, according to central bank data published Tuesday. With the government cut off from international credit, the central bank helps meet the shortfall by creating pesos and transferring them to the treasury.

Updated: 9-29-2021

Dollar Tree To Sell More Items Above $1 As Costs Rise

Discount chain expanding earlier tests to boost prices, citing higher wage and freight costs.

The buck has stopped at Dollar Tree Inc.

The retailer, which sells nearly everything for a dollar in its namesake chain, plans to add more products at slightly higher prices, highlighting the pressure on companies to offset cost increases for a range of goods.

Dollar Tree said it would start selling products at $1.25 and $1.50 or other prices slightly above $1 in some of its stores, expanding current tests selling items at higher price points as supply-chain snarls, a tight labor market and inflation push costs higher.

The discounter has experimented with selling items for $3 and $5 since 2019 in a shelf section labeled Dollar Tree Plus. Those tests continue in a few hundred of its roughly 7,900 Dollar Tree stores.

The addition of more above-$1 items is a response to rising costs and positive consumer feedback on tests so far, Michael Witynski, chief executive of Dollar Tree, said in an interview. With the above-$1 price point, the company can offer new products such as more frozen meat or seasonal items, which could encourage shoppers to spend more per trip, he said.

“We recognize the need to make adjustments in the current economic environment,” Mr. Witynski said, including “the pressure all of us are seeing on wages, freight and on our suppliers and cost increases.”

All stores with Dollar Tree Plus sections will get products at the above-$1 price points, as well as some legacy stores without the special section, said a company spokesman. He said over 100 legacy stores will carry the products.

While Dollar Tree is in an unusual position because of its pricing model, it is navigating a nearly universal problem for businesses around the world.

Makers of products from diapers to cars face higher costs for materials, transportation and workers. In many cases, manufactures and retailers are raising prices, but some are hesitating to pass along these costs to shoppers.

Some are betting inflation is a passing challenge or that consumers lack the appetite to absorb price increases. Many companies are working to negotiate with their suppliers further to shoulder more of the financial burden.

In recent months, supply-chain slowdowns have fueled a larger and longer-lasting surge in inflation than government officials anticipated, adding to pressure on holdouts to raise consumer prices.

For years some investors have clamored for Dollar Tree to boost profits by untethering itself from the $1 price point established when the company was founded in 1986. Many former and current executives see it as sacrosanct, a key reason shoppers gravitate to the store and the linchpin of a simplified operating model that drives profits.

In 2019, hedge fund Starboard Value LP dropped a planned proxy fight at Dollar Tree after the retailer showed openness to implementing some of the changes the hedge fund had sought, which included testing higher price points to boost profits. This year, as prices rise for many products, calls from investors to “break the buck” have intensified.

As of Tuesday evening, Dollar Tree’s stock had fallen around 20% this year, while the S&P 500 was up around 16%. Competitor Dollar General Corp.’s stock has risen around 2% so far this year.

Dollar Tree’s stock rose more than 16% in midday trading Wednesday.

The Chesapeake, Va., company sells most products at $1 through its Dollar Tree stores. At its roughly 7,900 Family Dollar stores, a chain that the company bought in 2015, products are sold at a range of prices.

In August, the company reduced its profit outlook for the full year, saying that rising supply-chain and freight costs would eat into earnings. The company now estimates earnings per share of $5.40 to $5.60, down from a range of $5.80 to $6.05 the company forecast in May.

Early in the year, the company assumed that ocean carriers supplying the company with products would fulfill around 85% of their contractual commitments, Mr. Witynski said on an August call with analysts. Now the company expects about 60% of commitments to be fulfilled and at higher rates, he said.

“Our products have lower price points than other retail importers and, as a result, our freight costs are a higher percentage of our gross merchandise margin,” Mr. Witynski said. The company also faces labor shortages in warehouses and stores, he said.

In response, Dollar Tree has reserved dedicated space on chartered vessels for the first time and is adding manufacturing sources that don’t rely on trans-Pacific shipping, said Mr. Witynski. It also is ordering some products earlier, has increased pay in some locations and is offering sign-on bonuses and hosting hiring events, he said.

In August, the company reported weak sales at its Dollar Tree chain, with comparable sales—those from stores or digital channels operating for at least 12 months—down 0.2% in the quarter ended July 31. Sales at its Family Dollar stores fell 2.1% after a strong pandemic-related sales surge during the same period last year.

The company’s merchants, who historically aim to buy products for around 43 cents, will also be able to work with suppliers to source slightly higher-priced items, said Mr. Witynski.

“These price points will bring a meaningful assortment that over time will have a positive impact on our performance,” he said.

Updated: 9-28-2021

Argentina’s Central Bank Has Increased Monetary Emission For Four Months

Argentina’s central bank has stepped up the pace of money printing to fund government spending ahead of November’s midterm elections, potentially stoking inflation in the months ahead.

Central bank financing of the government reached 250 billion pesos ($2.5 billion) in the first 22 days of September, the most of any month this year, according to central bank data published Tuesday. With the government cut off from international credit, the central bank helps meet the shortfall by creating pesos and transferring them to the treasury.

More Money Printing

Argentina’s Central Bank Has Increased Monetary Emission For Four Months

Financing of this type has increased for four straight months as President Alberto Fernandez seeks to boost spending on welfare and subsidies before the Nov. 14 vote. Argentina’s annual inflation rate was 51% last month, among the highest in the world.

Even after the recent surge, monetary creation has still slowed from the height of the Covid-19 crisis last year. So far this year, the monetary authority has transferred 960 billion pesos to the treasury, compared to about 2 trillion pesos for the whole of 2020.

Updated: 9-30-2021

Cost Pressures Aren’t Yet Crimping Corporate Profits

Earnings in the third quarter are likely to be buoyant despite rising costs.

Rising costs aren’t about to end corporate America’s profits party. But not all companies will be able to keep celebrating.

With the third quarter at a close, companies will soon begin reporting results. On balance, analysts expect them to be very good, with earnings per share 29.6% above the year-earlier level for companies in the S&P 500, according to estimates gathered by Refinitiv.

Actual earnings per share will almost certainly be better. Analysts have a tendency to low-ball their forecasts, and the third-quarter estimates appear unusually low. S&P 500 earnings are expected to show a sequential decline of about 7% from the second quarter, when the more typical seasonal pattern would be for them to rise a bit.

Moreover, although the U.S. economy might have slowed somewhat in the third quarter compared with the second, it still looks as if it grew, while the global economy made headway as well.

With supply chain bottlenecks pushing material, equipment and shipping costs up, and the challenge of finding workers sending labor costs higher, you can see why analysts might be a bit more cautious on their estimates. But a look through some of the economic data suggests that, at least in aggregate, profit margins aren’t coming under pressure yet.

For example, Labor Department figures show that wholesale prices for finished consumer goods, excluding food and energy items, were up 4.7% in August from a year earlier. That was the biggest gain in over a decade. But prices consumers paid for goods excluding food and energy were up 7.6% on the year in August.

The two data series aren’t strictly comparable, but it sure seems as if companies might be having some success in passing their costs on.

Wages are on the rise, too. In the first two months of the third quarter, an aggregate measure of earnings from the Labor Department was up by 1.8% from the second quarter. But as this is much slower than the pace of overall economic expansion plus inflation, it seems unlikely to hit companies’ bottom lines. By a similar token, a measure constructed by UBS strategists indicates the pr

Still, for some companies the good times have probably come to a close. Passing on higher costs isn’t something that all companies can do with ease. If they are selling something for which there are cheaper substitutes—say, a brand name with little differentiation from private-label alternatives—charging more might not be so easy.

The same goes for discretionary items that people can easily do without, or categories that people just expect to stay cheap, like pizza.

Moreover, in some areas cost pressures are more intense than others. Wage growth for workers with lower paying jobs has been rising much faster than for people with fatter paychecks. For businesses that tend to hire lower-wage workers, such as restaurants (which are also dealing with higher food costs) that is less than ideal.

For the most part, third-quarter earnings reports should look very good, but some investors could be in for a bad experience nonetheless.

Updated: 10-1-2021

Inflation Gauge Hits Highest Since 1991 As Americans Spend More

A closely watched measure of U.S. inflation rose the most on an annual basis in three decades, fueling concerns that price increases will last longer than expected and eventually hit consumer spending.

The personal consumption expenditures price gauge, which the Federal Reserve uses for its inflation target, rose 0.4% from a month earlier and 4.3% from a year earlier. The annual increase was the largest since 1991.

U.S. personal spending growth increased 0.8% from a month earlier, following a downwardly revised 0.1% decline in July, Commerce Department figures showed Friday. Spending in July was previously reported as a 0.3% gain.

The spending increase was driven by a jump in goods outlays, specifically food and household supplies, likely reflecting a shift away from activities like dining out and travel due to heightened health concerns.

Even though spending — which accounts for about two-thirds of gross domestic product — rose in August, the downward revision to the prior month points to “only a scant gain” in third-quarter outlays, according to a note from Wells Fargo & Co. Economists surveyed by Bloomberg expect the quarterly figure to rise 2.2% after increases above 10% for the previous two periods.

The median estimate in a Bloomberg survey of economists called for a 0.7% month-over-month increase in total spending and a 0.3% rise in the price index.

Stocks were higher as of 11:57 a.m. Friday in New York, the dollar fell and Treasuries were little changed.

Adjusted for inflation, spending in August also picked up after falling the previous month. Real personal outlays rose 0.4% in August after a revised decline of 0.5% in the prior month.

Inflation-adjusted spending on services rose 0.3% from a month earlier, marking a deceleration from the 0.7% gain in July. Merchandise outlays climbed 0.6% after a 2.6% drop, the report showed.
Inflation Metrics

Supply has struggled to keep up with rapidly recovering demand since the start of this year, with companies looking to fill a record number of open positions and acquire the materials needed for production. Those constraints have pushed prices higher and corroded Americans’ buying power.

The spending increase was driven by a jump in goods outlays, specifically food and household supplies, likely reflecting a shift away from activities like dining out and travel due to heightened health concerns.

Even though spending — which accounts for about two-thirds of gross domestic product — rose in August, the downward revision to the prior month points to “only a scant gain” in third-quarter outlays, according to a note from Wells Fargo & Co. Economists surveyed by Bloomberg expect the quarterly figure to rise 2.2% after increases above 10% for the previous two periods.

The median estimate in a Bloomberg survey of economists called for a 0.7% month-over-month increase in total spending and a 0.3% rise in the price index.

Stocks were higher as of 11:57 a.m. Friday in New York, the dollar fell and Treasuries were little changed.

Adjusted for inflation, spending in August also picked up after falling the previous month. Real personal outlays rose 0.4% in August after a revised decline of 0.5% in the prior month.

Inflation-adjusted spending on services rose 0.3% from a month earlier, marking a deceleration from the 0.7% gain in July. Merchandise outlays climbed 0.6% after a 2.6% drop, the report showed.
Inflation Metrics

Supply has struggled to keep up with rapidly recovering demand since the start of this year, with companies looking to fill a record number of open positions and acquire the materials needed for production. Those constraints have pushed prices higher and corroded Americans’ buying power.

The core PCE, which excludes food and energy, rose 0.3% for a second month. The measure was up 3.6% from a year earlier, matching the highest since 1991.

Fed Chair Jerome Powell said this week that the supply-chain disruptions which have been lifting inflation rates around the world will ultimately prove temporary.

“It’s very difficult to say how big the effects will be in the meantime, or how long they will last, but we do expect that we’ll get back, we’ll get through that,” Powell said Wednesday while participating in a virtual panel event.

A senior White House official said after the report that supply chain bottlenecks related to semiconductors and transportation “appear to be stickier” than was expected one or two quarters ago. “We’re watching those risks, but we’re encouraged by the trend lines,” the official said, referring to the slower pace of month-over-month price growth in recent reports.

A separate report out Friday showed U.S. consumer sentiment edged higher in late September, though remained near a pandemic low.

Wages And Savings

Personal incomes, meanwhile, rose 0.2% after increasing 1.1% in the prior month due to a boost from an advance disbursement of the child tax credit. Wages and salaries climbed 0.5%.

Disposable personal income, or after-tax income adjusted for inflation, decreased 0.3% in August.

The saving rate — which has been had been elevated for months as a result of stimulus checks and enhanced unemployment benefits — dropped to 9.4% in August from 10.1%.

DHL Raising Rates For U.S. Shippers by 5.9%

The increase matches a FedEx rate hike as carriers say inflation and investments are raising their costs.

DHL Express plans to raise rates for shipments for U.S. customers by an average of 5.9% starting Jan. 1, effectively matching a FedEx Corp. price increase for next year in an action that will raise costs for parcel shippers.

“You have general inflation, we’ve got to cover for that,” as well as added infrastructure, such as planes, trucks and facilities, said Mike Parra, chief executive for the Americas for the unit of Deutsche Post AG.

The increase announced Friday will apply to U.S. account holders shipping to or from the 220 countries and territories DHL Express serves, a spokesperson said. The company, which operates mostly international delivery services in the U.S. with limited domestic operations, increased rates by an average of 4.9% for 2021, and by 5.9% on average for 2020.

FedEx last month said it would raise its prices across its services next year by an average of 5.9%, the first time in eight years that the carrier or rival United Parcel Service Inc. went beyond a 4.9% annual increase. UPS hasn’t announced its plans for rates in 2022.

DHL Express said last month it would invest $360 million in upgrading and adding facilities in the Americas and bolstering its freighter fleet to handle surging e-commerce volumes in its network.

Cathy Roberson, head of research and consulting firm Logistics Trends & Insights LLC, said she expects the rising parcel costs to trigger changes in how businesses, particularly those shipping to consumers, manage their logistics.

“Retailers may need to rethink the whole ‘free shipping’ offering that they provide to their customers,” she said. “It’s going to end up having to be trickled down to the customer, because the shippers—such as retailers, manufacturers, wholesalers and so on—they can’t keep absorbing higher costs. They’ve got to pass them on in some form or another.”

Updated: 10-1-2021

Lumber Prices Stage A Late Season Rally

The gains aren’t likely the start of a wild ride like the one this past spring, analysts and executives say, but the increases show how some of this year’s surge in the price of raw materials is lingering.

Lumber prices are rising again.

Futures are up almost 40% since late August, while pricing service Random Lengths said that its framing composite index, which tracks on-the-spot sales, has added 27%. Analysts and industry executives don’t expect the gains to be the start of a wild ride like the one in spring that sent two-by-fours into orbit and then plunging back to earth.

Yet, the recent upturn shows how some of this year’s surge in the price of raw materials is lingering.

At $625.10 per thousand board feet, lumber futures are nearly as expensive as they ever were before the pandemic. Analysts say prices need to climb higher to balance supply with demand.

That could be a shock to builders and other buyers expecting market-equilibrium lumber prices to be closer to the $357 that futures averaged between 2015 and 2019.

“We think this $100 run that we’ve seen so far, that we’re not done yet,” said Paul Jannke, a lumber analyst for Forest Economic Advisors LLC. ”We do think over the next few years, on average, that prices are going to come off, but they are going to remain high relative to history,” he told clients of Canadian Imperial Bank of Commerce in a presentation this week.

This year’s lumber bubble pushed futures as high as $1,711.20 and prompted fears of runaway inflation. When it burst, investors and policy makers, including Federal Reserve Chairman Jerome Powell, pointed to plunging lumber as a sign that the soaring prices that accompanied the economic reopening were the result of kinked supply chains and would fade with distance from the clumsy restart.

At a congressional hearing Tuesday, however, Mr. Powell said that the burst of inflation this year has been broader and more persistent than anticipated because supply chains remain snarled. Lumber’s late-season climb is part of a broad rally in commodities in which natural gas prices rose 61% in the third-quarter and oat futures have been trading at record highs.

Paintmaker Sherwin-Williams Co. told investors this week to expect lower sales and profits this year due to scarcity of some materials and more expensive inputs like solvents and steel. The Cleveland company said the situation has worsened since Hurricane Ida slammed into Louisiana last month and upset operations at chemical plants and gas platforms along the Gulf Coast.

“In addition to the significant supply challenges, raw-material pricing remains highly elevated,” Chief Executive John G. Morikis told analysts Wednesday. “We continue to combat these elevated costs with pricing actions across our businesses.”

Big lumber buyers, from home builders to hardware stores and even casket makers, say they are still working through inventories of wood that were built up at high prices earlier this year.

Builders, including Lennar Corp. and Toll Brothers Inc. , say that the houses they have finished lately were built with lumber bought at highs. They say their profit margins should improve next year because the houses started now are being constructed with wood purchased since prices peaked. But the wood bills aren’t likely to be nearly as low as anticipated a few weeks ago.

Sawmills in British Columbia began curtailing output in July because the wildfires made it difficult to obtain logs and deliver lumber to customers.

Meanwhile, the cost of buying timber from the provincial government has risen sharply. The so-called stumpage price in British Columbia is determined by lumber prices months earlier. That has meant log prices have moved way up to reflect the spring surge at the same time lumber prices have declined.

As a result, many mills in one of the continent’s top lumber producing regions will make losses until log prices are reset lower next year, analysts say.

Canfor, which reduced output due to the wildfires, made deeper cuts in August, bringing all but one mill in British Columbia to about 80% of capacity. West Fraser Timber Co. , which is North America’s largest lumber producer, made its own curtailments, trimming output across its mills in Canada and the U.S. by between 5% and 10%. West Fraser blamed fires, as well as shortages of materials and labor, transportation problems and expensive logs.

Many companies, including West Fraser and Canfor, have plans to ramp up capacity in the U.S. South, where a glut of timber has made the region the most profitable place in North America to produce lumber. But those projects can take months and sometimes years to complete.

Georgia-Pacific on Wednesday said it would spend $120 million expanding and modernizing its lumber facility in Pineland, Texas, to boost capacity by about 18%. The company expects to finish late next year.

In the near term, lumber prices must rise to bring British Columbian mills back to profitability and full operating capacity, analysts say. Without robust production from Northwest Canada, demand could overwhelm dealers, who are holding less wood, as measured in months of supply, than any time in the past 20 years, according to Forest Economic Advisors.

“Over the next few months there will still be a lot of supply chain issues and dealers don’t want to get caught with low supplies,” Russ Taylor, a Vancouver wood market consultant. “We’re going to see very volatile prices.”

Eurozone Prices Rise At Fastest Rate In 13 Years

Energy prices accounted for much of the pickup in inflation in September.

Consumer prices in the eurozone rose at the fastest pace in 13 years during September, increasing the risk that a period of high inflation will prove more durable than the European Central Bank had anticipated.

Inflation rates around the world have jumped over recent months, a pickup in price pressures that most central bankers argue is likely to fade next year as economies emerge from a period of sharp and unanticipated swings in the demand for and supply of certain goods and services.

But they also concede that the longer the period of high inflation lasts, the higher the risk that it will become self-reinforcing as workers demand high pay deals to preserve their spending power and businesses gain confidence in their ability to pass those higher costs on to consumers.

The jump in eurozone inflation during September adds to the challenges faced by the ECB in justifying its view that the currency area’s economy will continue to need some support through next year and possibly beyond as it prepares for a key policy meeting in December.

The ECB has said its policy makers will in December decide what to do with a 1.85 trillion euro bond-buying program, equivalent to $2.14 trillion, that was launched last year to counter the economic effects of the pandemic. Most economists expect the ECB to announce it will end the program in March, but beef up another, longer-running program that is focused on more sustainably lifting inflation.

It has also signaled that it will keep interest rates in negative territory through 2023.

“With yet another surge in headline inflation, the heat is on for the European Central Bank’s December discussion,” said Carsten Brzeski, an economist at ING Bank.

The European Union’s statistics agency on Friday said consumer prices were 3.4% higher in September than a year earlier, a pickup in the annual rate of inflation from the 3% recorded in August. It was the highest rate of price increases since September 2008, and well above the ECB’s 2% target. The inflation rate was also a little higher than the central bank had expected.

Energy prices again accounted for much of the pickup in inflation, and were 17.4% higher than in September 2020. But energy prices in autumn 2020 were unusually low as the eurozone and global economies struggled to emerge from lockdowns designed to contain the Covid-19 virus. Central bankers call those statistical quirks “base effects” and say they will drop out of inflation numbers over the course of 2022.

The September jump in inflation was also driven by a faster rise in the prices of services, although that left them just 1.7% higher than a year earlier. Prices of manufactured goods rose more slowly than in August, despite widespread reports from businesses that they are facing long waiting times for goods, particularly those that have been ordered from Asia.

“Supply issues continue to wreak havoc across large swathes of European manufacturing, with delays and shortages being reported at rates not witnessed in almost a quarter of a century and showing no signs of any imminent improvement,” said Chris Williamson, an economist at IHS Markit, which conducts monthly surveys of businesses around the world.

There are some signs that some eurozone workers may respond to the period of high inflation by demanding larger pay rises than have been common over recent decades. Germany’s powerful IG Metall labor union Monday warned that its members may strike later this month if wood- and plastics-processing firms don’t agree to a 4.5% wage rise.

However, that action would affect a small number of workers, and wage rises elsewhere have remained modest. In a speech Tuesday, ECB President Christine Lagarde repeated her view that policy makers will soon be confronting the same problem that has stumped them for a decade: keeping inflation around 2% for more than a few months at a stretch.

“What we are seeing now is mostly a phase of temporary inflation linked to reopening,” she said. “So, we still need an accommodative monetary policy stance to exit the pandemic safely and bring inflation sustainably back to 2%.”

Updated: 10-3-2021

Zimbabwe Sees Inflation As High As 53% At Year-End

Zimbabwe’s central bank has revised its year-end inflation outlook for a third time, to as high as 53%, the Sunday Mail reported, citing John Mangudya, governor of the Reserve Bank of Zimbabwe.

“Annual inflation is likely to end the year between 35% and 53%, up from the revised targets of between 25% and 35%,” Mangudya was quoted by the Harare-based weekly newspaper. The bank’s initial annual inflation forecast for year-end was under 15%.

A rise in global commodity prices, a planned increase in power tariffs and a weakening of the local currency against the U.S. dollar on the black market were cited inflationary factors. Annual inflation rose in September to 51.55%, the first increase in eight months.

Updated: 10-5-2021

South Africa’s Central Bank Model Urges Rate Hikes

South African central bank modeling suggests the need for the gradual lifting of borrowing costs to keep inflation close to the 4.5% midpoint of its target range, and long-term interest rates low.

The key rate is at a record-low 3.5%, after the monetary policy committee cut it by three percentage points in 2020, of which 275 basis points of easing was to counter the damaging effects of the Covid-19 pandemic.

Since the start of this year, none of the five MPC members have voted for further easing and the panel has consistently indicated that the next move will be an increase.

The stronger-than-expected economic recovery in the first half of 2021, when output rose 7.5% from a year earlier, suggests inflation pressures may be stronger than initial predictions. Price increases are already around 4.5% where the central bank prefers to anchor expectations.

That, together with the narrowing between potential growth and actual expansion means the benchmark rate must move toward its neutral level over the medium term to reduce stimulus and keep price growth contained, the South African Reserve Bank said Tuesday in its six-monthly Monetary Policy Review.

“Delaying the lift-off could see the monetary policy authorities playing catch-up with inflation, potentially destabilizing the relatively well-anchored inflation expectations.”

The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide, indicates a 25-basis point increase in the final quarter of this year and in every quarter of 2022 and 2023.

Forward-rate agreements, used to speculate borrowing costs, are pricing in an almost 100% chance of a quarter-point increase at the bank’s November meeting, while most economists expect the benchmark to remain unchanged until the first quarter of next year.

That’s as economists expect the MPC to continue supporting an economy seen contracting in the three months through September, partly due to deadly riots, arson and looting that erupted in July and derailed economic activity in the two biggest provinces by contribution to gross domestic product.

If not for the unrest, the economy could have recouped most of last year’s pandemic-induced GDP losses by the end of 2021, the central bank said.

The bank expects the economy to contract 1.2% in the third quarter and for growth to average 5.3% in 2021, a sharp recovery from last year when output fell the most in almost three decades. Should that translate to higher demand, risks to the inflation outlook could become more pronounced.

While South Africa’s modest inflation trajectory underpinned the MPC’s decisions to keep the key rate on hold since July 2020, risks to the outlook “have risen and become more broad-based, while real rates have become more negative as expected inflation has risen,” the bank said.

“These developments imply a need for interest rates to begin normalizing. The nominal repo rate is expected to gradually rise toward its neutral level over the medium term,” it said.

The domestic neutral rate is calculated at about 2.1%, the central bank said in July.

South Africa’s inflation rate rose for the first time in three months in August and material upside risks now include elevated global food prices, high administered prices especially for water, electricity and fuel, skills shortages, rising global prices and supply constraints, it said.

While policy makers prefer to anchor price-growth expectations around the middle of the target range, Governor Lesetja Kganyago has previously said that isn’t optimal and has recently been advocating for a lower, single-point target close to 3%.

New Zealand Abandons Covid Zero. Here Come Interest-Rate Hikes

The central bank has pulled the trigger on a long-awaited increase. It’s unlikely to be the last as it learns the virtues of nimbleness while living with the virus.

Living with Covid-19 means embracing interest-rate increases. The more of the latter, the better.

That’s the view from New Zealand, whose central bank proceeded Wednesday with a widely anticipated hike in its benchmark rate to 0.5%, the first nudge higher in seven years. The Reserve Bank made it clear the move is unlikely to be the last. Inflation is above the RBNZ’s target and the local labor market is robust.

The climb in borrowing costs is important because officials were on the brink of moving in August, but blinked after a single coronavirus case led to a national lockdown. It seems ludicrous that one infection would lead to a major countrywide disruption.

That was when New Zealand prided itself on having had no cases since early in the year, but with vaccination rates low, there was significant potential for trouble. The RBNZ worried about the optics of tightening.

Now that New Zealand has abandoned its zero-tolerance strategy and the government says it accepts the virus isn’t going anywhere, the central bank is free of the messaging challenges that constrained it two months ago.

“Elimination was important because we didn’t have vaccines,’’ Prime Minister Jacinda Ardern said Monday. “Now we do, so we can begin to change the way we do things.’’

While the central bank sets monetary policy independently, the political shift has helped the bank get off the dime. There will less chance of finger-pointing and perhaps fewer awkward questions next time RBNZ top brass testify before parliament.

You can almost hear Governor Adrian Orr exhale in Wednesday’s statement. “The current Covid-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August statement. Capacity pressures remain evident in the economy, particularly in the labor market.”

The increase puts New Zealand in the vanguard of countries that aren’t waiting for the Federal Reserve — the most powerful central bank — to scale back stimulus. Rate hikes have already begun in advanced economies like Norway and South Korea.

People in New Zealand will likely embrace membership of this club; the country’s early adoption of an inflation target three decades ago is often worn as a badge of honor.

Is this a good thing? New Zealand has in the past moved aggressively early to crack down on price increases, only to overshoot and scramble to recalibrate. When the RBNZ began raising rates in 2014, it did so quickly and sounded comfortable being an outlier.

The following year, officials had to backtrack. Rates came down rapidly when inflation didn’t materialize as anticipated. It didn’t take a rocket scientist to figure that out — the world’s most consequential central banks were keeping rates rock bottom, worried that inflation was too low and might remain so.

There are some encouraging signs that New Zealand has learned the virtues of nimbleness. While the bank flagged further removal of stimulus, it said that would transpire “over time.’’ Supply-chain disruptions will likely add to inflation pressures.

The bank also acknowledged the hit to business from lockdowns. “There will be longer-term implications for economic activity both domestically and internationally from the pandemic,” the bank said.

A broader note of caution for New Zealand. Declarations about the worthiness of living with Covid-19 don’t mean a sure-fire return to pre-pandemic conditions. Singapore provides a sobering example. A high vaccination rate — in excess of 80% — did mean some loosening of curbs.

It also meant a surge in cases that had authorities backtracking on some relaxations. Further steps to reopen have been put on ice. After a brief return to offices, work from home is again the default, vaccinated or not. New Zealand isn’t close to Singapore’s level of vaccination.

That probably heralds a problem for the future. Wednesday is a day for celebrating in New Zealand. Interest rates are going up. Maybe normality is in sight, for a while.

Updated: 10-6-2021

Poland Unexpectedly Raises Rates For First Time Since 2012

Poland unexpectedly raised borrowing costs for the first time since 2012, caving in to government and investor pressure to tackle soaring inflation that’s already triggered interest-rate hikes across eastern Europe.

The central bank didn’t specify if Wednesday’s increase in the reference rate to 0.5% from a record-low 0.1% was a one-time move or the start of a tightening cycle. Governor Adam Glapinski — who just a day ago suggested the benchmark could stay on hold even until 2023 — will hold a news conference on Thursday.

The move came hours after Prime Minister Mateusz Morawiecki said that he expected an “appropriate” response from the central bank to the fastest price growth in two decades — comments some saw as a sign that political acceptance for higher inflation was running out.

The zloty notched the biggest advance among emerging-market currencies on the news, which wasn’t predicted by any of the 29 economists surveyed by Bloomberg. Bonds extended a selloff and the WIGBank index of Warsaw-listed lenders hit its highest level since 2018.

The central bank’s statement failed to clarify the Monetary Policy Council’s outlook on rates. They dropped a paragraph about continuing quantitative easing but didn’t specify if the program had ended. They reaffirmed that currency interventions, which they used in late 2020 to weaken the zloty, remained part of their toolkit.

The declaration on interventions “can be read as an attempt to soften the hawkish tone of today’s decision,” said Piotr Bartkiewicz, an economist at Bank Pekao SA. “Thus, the gate is open for further rate hikes — and thus a normal tightening cycle — as well as to a stabilization of rates.”

Glapinski U-Turn

Three of Glapinski’s predecessors warned this week in an open letter that further delays to rate increases would jeopardize the economy and amount to a breach of the central bank’s price-stability mandate.

The MPC meeting’s outcome is surprising because only a day earlier Glapinski stuck to his contested stance that the surge in prices was temporary and caused by factors beyond central bank control, such as sky-rocketing energy costs.

During a speech on the eve of the MPC meeting, Glapinski called economists who demanded an immediate hike “amateurs or politicians,” and that bank analysts’ views were skewed because higher rates increase lenders’ profits.

“If external impulses turn into expectations and wages, and that would fix inflation at a higher level”, then “in two, three, four or five quarters, if we acknowledge that such a threat becomes real, a decisive withdrawal from accommodative policy would be needed,” the governor told the Congress 590 forum on Tuesday.

Communication Breakdown

Grzegorz Maliszewski, an economist at Bank Millennium SA, said the surprise followed “inadequate” central bank communications about the state of the economy and pandemic risks, while the MPC statement “wasn’t helpful” in assessing policy makers’ future steps.

In its communique on Wednesday, the bank said that consumer-price growth — the fastest in the European Union at 5.8% — would remain elevated. The MPC targets medium-term inflation of 2.5% with a tolerance band of +/- 1 percentage point.

“The central bank couldn’t ignore such inflation any longer,” said Monika Kurtek, chief economist at Bank Pocztowy SA. “On the other hand, it’s a completely shocking decision in light of Glapinski’s comments up to now.”

The move aligns Poland more with countries nearby. Hungary and the Czech Republic have raised rates several times already in response to similar inflation surges and plan to hike further. Romania unexpectedly lifted rates on Tuesday for the first time since 2018.

For analysts at ING Bank Slaski SA, there are more rate hikes in the works, eventually bringing the benchmark to 2%, compared with 1.5% pre-pandemic.

“This isn’t the end,” they said in a tweet. “We see a large fiscal expansion in 2022 and high inflation.”

Surging U.K. Inflation Is Already A Problem For Johnson’s Agenda

Prime Minister Boris Johnson’s vow to turn the U.K. into a high-wage, high-skill economy is running into an immediate problem: a significant spike in inflation driven by the economic chaos he chose to gloss over at this week’s Conservative Party conference.

A combination of higher energy prices, labor shortages and supply-chain disruptions are forecast to push inflation past 4% this year — double the Bank of England’s target. Financial markets imply that a separate index used to price student loans and train tickets could reach 7% by April.

“Wages are barely rising above inflation, and millions of key workers — who got us through this crisis — are facing a real-terms pay cut this autumn,” said Frances O’Grady, secretary-general of the Trades Union Congress.

Those issues are so thorny that they prompted BOE Governor Andrew Bailey last week to joke about how a plague of locusts may be next. But in speeches and interviews this week, the prime minister dismissed concerns about an impending economic crisis. Research and lobby groups are much less relaxed after Johnson’s speech on Wednesday.

The British Chambers of Commerce, which warned on Tuesday that businesses are facing an “historic surge” in inflationary pressures, said while Johnson’s future vision “should be rightly applauded,” firms need answers to problems they’re “facing in the here and now.”

Another key employers group also pointed out the difficulties ahead.

“The prime minister has set out a compelling vision for our economy: High wages, high skills, high investment and high growth,” Tony Danker, head of the Confederation of British Industry, said after the speech. “Ambition on wages without action on investment and productivity is ultimately just a pathway for higher prices.”

Updated: 10-8-2021

India Said To Ask Phosphate Fertilizer Firms To Absorb High Cost

India won’t increase subsidies on phosphorus-based fertilizers and has directed producers to refrain from raising prices, according to people with knowledge of the matter, threatening the firms’ margins as global costs of the raw material surge.

Chemicals and Fertilizers Minister Mansukh Mandaviya instructed the companies, the people said, asking not to be identified as the details aren’t public. A spokesperson of the fertilizer ministry declined to comment.

Prices of phosphoric acid and ammonia, used to make the soil nutrient, have soared in the world market due to tight supplies, putting pressure on Indian producers as they import a majority of their requirements. Some global ammonia makers have cut output or are seriously considering that option due to high natural gas prices.

The government raised the subsidy on the nutrient in June to 45.3 rupees ($0.60) per kilogram for monsoon-sown crops — from 14.89 rupees a year earlier — to shield farmers in the country where about 60% people depend on agriculture for their livelihood.

Fertilizers in India are sold at a price that’s generally below the cost of production, with the government compensating the producers for the shortfall.

Brazil Comes Out of Pandemic and Hits the Next Hardship—Inflation

Prices of electricity and cooking gas are up 30% or more over the year, while meat prices are up 25%.

Brazil has become the latest country to emerge from the worst of the pandemic only to face its highest inflation rate in years.

Prices rose in September at the fastest pace for the month since 1994, while the 12-month figure reached 10.25%, returning Brazil to double-digit inflation for the first time in more than five years, the country’s national statistics agency, IBGE, said Friday.

Countries from the U.K. and Canada to Indonesia and other parts of the developing world have struggled with rising consumer prices as life begins to get back to normal with Covid-19 cases dropping. As businesses open up and more people begin to travel and spend again after widespread vaccination campaigns, energy prices have soared and supply bottlenecks have boosted inflation.

Brazil’s soaring prices come as a warning to Latin America that the region’s relative success in vaccinating swaths of its population could be rewarded with an inflation shock, economists said.

“Just about every country across Latin America has had a significant increase of economic activity,” said Alberto Ramos, an economist at Goldman Sachs. “The high level of immunity allows life to get back to normality, and that puts pressure on prices that were depressed during the pandemic, especially services.”

High acceptance of vaccines across the region has allowed governments to quickly immunize their populations as global supplies of Covid-19 shots become widely available.

About 72% of Brazilians have now received at least one vaccine dose, more than in the U.S., where 64% have gotten at least one shot, according to Our World in Data.

Consumer prices have risen in the past month in Mexico, Chile, Colombia and Peru, paving the way for further interest rate increases across the region. In Chile, 12-month inflation reached 5.3% in September, while it is above target in Mexico at 6%. In Colombia, the 12-month rate rose to 4.51% last month.

In Brazil, local factors have added to inflation woes, which have been particularly hard on the poor, who have also suffered from soaring unemployment during the pandemic.

Inflation has broader political implications in Brazil, where older generations are still haunted by the memory of punishing hyperinflation in the 1980s and 1990s.

Rising prices mean that many poorer voters, who supported President Jair Bolsonaro in the 2018 election, could put their faith once again in a leftist leader, former President Luiz Inácio Lula da Silva, to improve their lot, political scientists said.

A severe drought, the worst in almost a century, has dried up hydroelectric reservoirs, forcing the country to switch to more expensive thermal plants. Hydropower now represents about 70% of power generation.

The price of electricity rose 6.47% in September from August, and it is up almost 30% over the year. With the price of cooking gas also soaring about 35% over the year on the back of higher global gas prices, many poor Brazilian families have taken to cooking their meals on open fires, risking accidents and respiratory problems.

The drought has also hit crops and cattle feed, driving up the price of meat by almost 25% over the past year and the price of rice, a staple for Brazilians, by more than 11%.

Latin America’s Surging Prices Spell Hard Work For Central Banks

Painful price increases across Latin America in September mean lots more work for the region’s major inflation-targeting central banks.

Consumer prices soared well past policy maker’s tolerance levels in Brazil, Mexico, Chile, Colombia and Peru last month, largely on rising food and energy costs. The price shocks suggest inflation may be spreading to core items and services, paving the way for more interest rate hikes across the region.

Central banks are grappling with rising services prices as people resume their normal lives, while droughts and extreme weather cause energy bills to spike throughout the region. At the same time, fiscal concerns over pandemic spending persist as nation’s like Chile continue to inject billions of dollars worth of aid into their economies.

On Friday, annual inflation in Brazil, Latin America’s largest economy, clocked 10.25% — more than double the central bank’s target of 3.75%, and the fastest pace since February 2016. In Chile, consumer prices rose 5.3% from a year ago, the most since 2014.

What Bloomberg Economics Say

“Food and fuel are the two main sources of pressure across the region. Then looking at the core, inflation of tradable goods has also increased, due to higher global inflation, transport costs and in some countries currency depreciation. The fear is that high inflation mainly due to transitory shocks ends up spreading to prices of other goods and services and contaminating expectations.”

–Felipe Hernandez, Latin America economist

In Colombia, where annual inflation is running at 4.51%, authorities responded by raising interest rates for the first time in over five years last week. Other countries are facing even higher prices despite applying more restrictive monetary policy.

Mexico’s annual inflation accelerated to 6% even as the central bank raised interest rates by 75 basis points since June, and cooking gas prices were capped. Mexico, Chile and Colombia target annual inflation at 3%, with a tolerance range of plus or minus one percentage point.

Shocks And Demand

Supply-chain snarls are now compounding demand challenges in Mexico like elsewhere in the region, said Joan Domene, an economist with Oxford Economics. “We have too many shocks in a country prone to many inflationary shocks,” he said.

The combined effect has damped efforts by policy makers to rein in prices, while domestic volatility has complicated matters in some places. “The currency meltdown and surge in commodity prices explain much of the recent increase,” in Brazil, said Adriana Dupita, a Latin America economist with Bloomberg Economics.

Brazilian authorities have raised the Selic rate by 425 basis points since March in response, and signaled another full-percentage point hike is coming later this month.

Still, inflation expectations for 2022 have continued to rise due to political clashes between the top court and President Jair Bolsonaro, and concerns over how much he’ll ramp up public spending before his 2022 re-election bid.

Meanwhile in Peru, where annual inflation is running at 5.2% — more than double target — investors continue to fret over the leftist of administration of President Pedro Castillo.

The sol is still down more than 11% since Castillo won the first round of Peru’s presidential election in April despite a recent interest rate increase. To ease some of those fears, Castillo has retained Julio Velarde, one of Latin America’s longest-serving central bank chiefs, as head of the monetary authority.

Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said persistent inflationary pressures mean central banks will have to act faster to limit the damage.

“And in most places they also have to guard against financial instability given unsettled fiscal and political backdrops,” he said.

Updated: 10-9-2021

Central Bankers Are Spooked by Signs That Inflation Is Lingering For Longer

Many central banks are starting to withdraw the emergency stimulus they introduced to fend off last year’s pandemic recession.

With inflation accelerating, the Federal Reserve is set to slow its asset-purchase program, while peers in Norway, Brazil, Mexico, South Korea and New Zealand are among those to have already raised interest rates.

Behind the shift are signs that the recent inflation scare won’t fade soon amid supply chain strains, surging commodity prices, post-lockdown demand, ongoing stimulus and labor shortages.

Complicating the task for policy makers is that growth may be slowing, prompting some to warn of a stagflationary-lite environment.

That puts central bankers in a bind as they debate which risk they should prioritize. Targeting inflation with tighter monetary policy adds to the pressure on economies, but trying to boost demand may ignite prices further.

For now, the feeling of many is that inflation has lingered longer than most predicted. As Huw Pill, the Bank of England’s new chief economist, said last week, the “balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated.”

Not all are as concerned or looking to change tack. Officials at the European Central Bank and Bank of Japan are among those intending to keep stimulating their economies aggressively. And the International Monetary Fund predicts that in advanced economies at least, inflation will soon ease to about 2%.

What Bloomberg Economics Says:

“Stagflation is too strong a word. Still, supply shocks that lift prices and lower output leave monetary policy makers with no easy options. With little urgency to act, the Fed and other major central banks are preserving optionality. If stubborn inflation forces their hand, the global recovery will face an additional drag.”

–Tom Orlik, chief economist

Here Is Bloomberg’s Quarterly Guide To 23 Of The World’s Top Central Banks, Covering 90% Of The World Economy

Group Of Seven

U.S. Federal Reserve

* Current Federal Funds Rate (Upper Bound): 0.25%
* Bloomberg Economics Forecast For End Of 2021: 0.25%
* Bloomberg Economics Forecast For End Of 2022: 0.25%

Jerome Powell, who’s waiting to hear if he’ll be renominated for another four years at the helm of the Fed, has recently taken a step toward scaling back massive pandemic support.

The Fed chair last month said the U.S. central bank could start to taper monthly bond purchases as soon as November. Getting that started is top of his to-do list, alongside persuading Americans that the Fed is also keeping an eye on higher-than-expected inflation.

He’ll try to communicate that message without giving the impression that the Fed is getting closer to raising near-zero interest rates, even though policy makers were evenly split on rate liftoff next year, according to quarterly projections they released Sept. 22.

But the forecasts — displayed as anonymous dots on a chart — can be affected by shifts in personnel. In addition to Powell’s chairmanship, President Joe Biden has the chance to pick three other governors on the seven-seat Board in Washington. A decision on the chair is expected this fall.

There are also changes coming among the 12 regional Fed presidents. Two of the most hawkish — Dallas Fed President Robert Kaplan and Boston’s Eric Rosengren — are stepping down following revelations about their trading activity in 2020. Rosengren cited a serious health condition in announcing his early retirement.

What Bloomberg Economics Says:

“Stubbornly high inflation means risks appear to tilt toward an earlier hike than our current baseline of a 2023 move. However, our analysis of the views of voting FOMC members in 2022 suggests that the majority prefers a somewhat more accommodative timeline than implied by the committee median. After Rosengren’s early resignation, we think four 2022 voters currently favor a hike, against six for a hold next year.”

–Anna Wong

Rosengren’s Exit Leaves Just Four Hike Votes In 2022

European Central Bank

* Current Deposit Rate: -0.5%
* Bloomberg Economics Forecast For End Of 2021: -0.5%
* Bloomberg Economics Forecast For End Of 2022: -0.5%

The ECB is preparing for a major policy update in December, when projections through 2024 will show how much progress inflation is set to make toward sustainably reaching a newly set 2% goal.

Global supply bottlenecks and a series of one-time factors have pushed price growth far above that rate, though pressures are expected to ease over the course of next year.

Policy makers led by President Christine Lagarde have already decided to slow purchases under their 1.85 trillion-euro ($2.2 trillion) pandemic program in the fourth quarter, and are likely to allow the plan to expire in March. A debate in coming months about how to redesign the ECB’s older bond-buying scheme may prove more contentious, with some advocating more flexibility and an increase in pace that others say may not be needed.

What Bloomberg Economics Says:

“Wage growth is unlikely to accelerate sustainably until the significant spare capacity in the labor market is absorbed. That will leave many on the Governing Council doubtful about the persistence of inflation and pushing for an increase in bond buying through the Asset Purchase Programme. They will also be concerned about the credibility of the ECB’s commitment in its strategy review to more ‘forceful or persistent’ action at the effective lower bound.”

–David Powell

Bank of Japan

* Current Policy-Rate Balance: -0.1%
* Bloomberg Economics Forecast For End Of 2021: -0.1%
* Bloomberg Economics Forecast For End Of 2022: -0.1%

Bank of Japan Governor Haruhiko Kuroda News Conference As Central Bank Ramps Up Asset Buying, Holds Rates Steady After Fed Cut

Haruhiko Kuroda

BOJ Governor Haruhiko Kuroda must now work with a new prime minister, Fumio Kishida, to guide the economy out of the pandemic. The BOJ could decide this quarter to extend its Covid funding measures or wrap them up by the end of March, as planned.

The policy board will be watching to see if the recovery benefits from a release of pent-up demand after restrictions on activity were finally lifted last month, and as vaccination rates rise.

Still, inflation that’s forecast to stay below target for years means the bank is unlikely to let up on its main stimulus any time soon, even as peers move toward normalization. That divergence should keep the yen weak, providing a tailwind for Japan’s export-led recovery.

What Bloomberg Economics Says:

“Some central banks are looking to exit. Not the BOJ — it’s far behind. We expect it to stay on cruise control through 2022. Goushi Kataoka, a prominent reflationist on the policy board, will see his term expire next summer. Japan’s new administration could fill his seat with a person who has a more balanced view on monetary policy – supporting a move toward normalization..”

–Yuki Masujima

BOJ Board Is United for Fighting Covid Crisis

Bank of England

* Current Bank Rate: 0.1%
* Bloomberg Economics Forecast For End Of 2021: 0.1%
* Bloomberg Economics Forecast For End Of 2022: 0.25%

With U.K. inflation on course to hit more than double the BOE’s 2% target by the end of the year, speculation is mounting the institution will be the among the first of its G-7 peers to start unwinding pandemic-era rate cuts.

While officials said in September that they didn’t necessarily have to wait until their bond-buying plan finishes at the end of this year to act, most economists are penciling in the first move in for 2022. Markets are even more aggressive, and at one stage were predicting three increases next year.

Still, concerns that a premature tightening would choke off the recovery may yet stay the BOE’s hand, especially as U.K. consumers prepare for a difficult winter of mounting bills.

What Bloomberg Economics Says:

“Inflation is becoming increasingly hard to ignore for the BOE. But we expect a rise in unemployment, following the end of the government’s furlough scheme, and a slower recovery to cool concerns among policy makers. That should mean interest rates are left alone until May. Still, we can’t rule out an increase this year if inflation continues to surprise and expectations drift higher.”

–Dan Hanson

Bank of Canada

* Current Overnight Lending Rate: 0.25%
* Bloomberg Economics Forecast For End Of 2021: 0.25%
* Bloomberg Economics Forecast For End Of 2022: 0.5%

The Bank of Canada’s next meeting is on Oct. 27, where it will release an updated set of quarterly forecasts. Economists largely expect the central bank to revise down its forecast for the third quarter after July and August monthly GDP showed the quarter tracking well below its previous 7.3% forecast.

While the institution is not expected to change its policy rate, economists will be watching for changes to the pace of asset purchases or forward guidance.

Governor Tiff Macklem has already reduced the pace of government bond buying three times in the past year and is expected to taper asset purchases once more this month to C$1 billion in Government of Canada bonds per week.

It’s also possible the Bank of Canada will provide some update around its forward guidance, which currently states it will keep interest rates low until the output gap is closed and inflation returns sustainably to 2% — something it doesn’t see occurring until the second half of next year.

What Bloomberg Economics Says:

“As economic reopening bumps up against fractured supply chains, consumer price inflation may prove stickier for longer. Our updated projections have inflation holding above 4% through 2021, slowing to an average of 2.5% in 2H 2022. As the output gap closes in 4Q 2022, an initial rate hike happens a quarter sooner than we previously expected.”

–Andrew Husby

BRICS CENTRAL BANKS

People’s Bank of China

* Current 1-Year Loan Prime Rate: 3.85%
* Bloomberg Economics Forecast For End Of 2021: 3.85%
* Bloomberg Economics Forecast For End Of 2022: 3.75%

China’s central bank began gradually curbing credit expansion to control financial risks this year once the economy’s recovery from the pandemic was well underway. However, the economy started showing signs of weakening in the second half, prompting authorities to make a surprise shift in July by reducing the amount of cash banks must hold in reserve — in part to help banks with liquidity needs, but also to boost lending to small businesses hurt by rising commodity prices.

Since then, growth risks have only gotten worse. Stringent virus control measures to contain sporadic outbreaks have made still-cautious consumers even more wary of spending.

A debt crisis at a major property developer has roiled financial markets, while Beijing’s tighter restrictions on the real estate market have caused a slump in construction investment.

More recently, an electricity shortage has forced factories to shut, with ripple effects across global supply chains. That weaker outlook means the central bank will likely reduce the reserve requirement ratio for banks again, economists predict, and possibly even lower its policy rates.

What Bloomberg Economics Says:

“China’s economy is facing a range of downside risks, from power shortages to virus outbreaks and weak consumption. Market strains from the crisis at Evergrande are another worry. We expect the PBOC to keep a loose stance to cushion the slowdown – pumping more liquidity into the banking system and cutting the reserve requirement ratio by another 50 basis points, probably in October or November.

A rate cut is unlikely in the near term – that would only fuel financial imbalances that the authorities are keen to curb.”

–David Qu

Reserve Bank of India

* Current RBI Repurchase Rate: 4%
* Bloomberg Economics Forecast For End Of 2021: 4%
* Bloomberg Economics Forecast For End Of 2022: 4%

India’s central bank suspended its version of quantitative easing this month, signaling the start of tapering pandemic-era stimulus measures as an economic recovery takes hold.

While it kept the benchmark repurchase rate unchanged at a historic low of 4% and the monetary stance dovish, it made a gradual move to withdraw the billions of dollars it has pumped in since the start of the pandemic last year.

That liquidity injection risks adding to inflationary pressures and fueling an asset bubble with policy makers growing increasingly confident that the nascent recovery will gather pace as vaccination picks up and chances of a third wave ebb.

The Reserve Bank of India expects pent-up demand and the festival season to give a fillip to urban demand in the second half of the financial year to March 2022, while rural demand is expected to be underpinned by a near-normal monsoon and record food grain production.

What Bloomberg Economics Says:

“The RBI’s decision to suspend quantitative easing at its October policy marked a retreat from its previous stance of keeping long-term sovereign bond yields in check. This is likely to steepen the yield curve, but we don’t see it is as a pre-cursor to an imminent policy rate hike.

We are sticking to our view that the RBI will keep policy rates low for longer to revive growth on a more durable basis. We expect it to begin a gradual rate hike cycle in April 2022 by first raising the reverse repo rate and see the first repo rate hike only in February 2023.”

–Abhishek Gupta

Central Bank of Brazil

* Current Selic Target Rate: 6.25%
* Bloomberg Economics Forecast For End Of 2021: 8%
* Bloomberg Economics Forecast For End Of 2022: 8.5%

Brazil’s central bank has unleashed the world’s most aggressive monetary tightening campaign this year, raising its benchmark interest rate by 425 points since March and promising to take it to a “significantly restrictive” level until inflation expectations ease back to target.

Yet prices are rising by more than 10% a year, the fastest pace since 2016, and expectations for 2022 are running above the 3.5% goal.

Complicating matters for policy makers led by Roberto Campos Neto is a severe drought that’s making hydro electricity costlier, just as commodities and food prices jump across the globe and local demand for services grow with the economic reopening.

All things considered, traders in the local futures market are already betting that the Selic will end 2022 above 10%.

What Bloomberg Economics Says:

“Inflation continues to run hot, and appears headed to a slow descent in the coming quarters. In an effort to bring inflation expectations for 2022 back to the center of the target, the central bank indicated that it intends to bring the monetary policy to tight territory for the first time since 2017 — but has not hinted on how tight the policy will be.

We expect the BCB will continue to raise the policy rate through February, after when the shifting focus to 2023 inflation will give the monetary authorities some reason to pause and monitor the effects of the tightening introduced that far.”

–Adriana Dupita

Bank of Russia

* Current Key Rate: 6.75%
* Bloomberg Economics Forecast For End Of 2021: 7.25%
* Bloomberg Economics Forecast For End Of 2022: 6%

The Bank of Russia raised its benchmark rate to 6.75% on Sept. 10, meaning Governor Elvira Nabiullina has delivered a total of 250 basis points of tightening this year. And there’s no sign she’s done: Nabiullina said it may take more than one rate increase to tame runaway inflation and curb inflation expectations, which remain elevated.

Consumer-price growth accelerated to 7.4% in September from a year earlier. That was above economists’ expectations and boosts the chances for a 50 basis-point rate increase on Oct. 22. Delays in the domestic harvest as well as climbing food prices globally are keeping Russia’s inflation rate at the fastest pace in half a decade.

What Bloomberg Economics Says:

“Most of the spike in Russia’s inflation looks fleeting, but the central bank isn’t taking any chances. Resilient demand and rising inflation expectations pose a more persistent threat once supply shocks fade. Policy makers are likely to favor another 50 bps of tightening this month to regain control. If price pressure remains elevated, further hikes may follow.”

–Scott Johnson

South African Reserve Bank

* Current repo average rate: 3.5%
* Bloomberg Economics forecast for end of 2021: 3.5%
* Bloomberg Economics forecast for end of 2022: 4.5%

South Africa’s central bank has made it clear that its next move will be to raise borrowing costs.

While no member of its monetary policy committee has voted for tightening this year, that could change at its next meeting as the panel now sees material upside risks to its inflation outlook. It prefers to anchor price-growth expectations close to the 4.5% midpoint of its target range and sees inflation at or below the level through 2023.

The implied policy rate path of the quarterly projection model, which the MPC uses as broad policy guide, indicates a 25-basis point increase in the final quarter of this year and in every quarter of 2022 and 2023. “Delaying the lift-off could see the monetary policy authorities playing catch-up with inflation, potentially destabilizing the relatively well-anchored inflation expectations,” the Reserve Bank said Tuesday in its six-monthly monetary policy review.

What Bloomberg Economics Says:

“The SARB continues to signal the need for a gradual normalization of rates from the record low of 3.5%. It’s model points to 4Q as the possible start, but we expect ongoing virus uncertainty and still muted core inflation to push this out to 1Q2022. The bank envisions only a gradual rise in rates, however, rising inflation risks and the anticipation of higher U.S. rates could speed up the monetary tightening cycle once it begins.”

–Boingotlo Gasealahwe

MINT CENTRAL BANKS

Banco de Mexico

* Current Overnight Rate: 4.75%
* Bloomberg Economics Forecast For End Of 2021: 5.25%
* Bloomberg Economics Forecast For End Of 2022: 5.5%

Mexico’s central bank has been slowly removing the monetary stimulus granted during the pandemic, raising the overnight interest rate by a quarter percentage point in each of its last three board meetings through September.

Defying Banxico’s initial projections that inflation would slow by the end of the year, consumer prices have been rising at an annual pace of around 6% since April, double the central bank’s target.

The deterioration in inflation expectations takes place as Banxico is going through a leadership change: Governor Alejandro Diaz de Leon will finish his term at the end of the year and he is set to be replaced by former Finance Minister Arturo Herrera, a change that led to speculation about the board being more dovish in the future.

What Bloomberg Economics Says:

“We expect Banxico to increase its policy rate by 25 basis points in November and again in December — closing the year at 5.25% — to anchor inflation expectations. Decelerating inflation, weak growth and near-neutral rates next year should allow for a pause until the Federal Reserve begins hiking.”

–Felipe Hernandez

Bank Indonesia

* Current 7-day reverse repo rate: 3.5%
* Bloomberg Economics forecast for end of 2021: 3.5%
* Bloomberg Economics forecast for end of 2022: 3.75%

It’s smoother sailing for Bank Indonesia this quarter, with the nation’s worst Covid-19 wave contained and the economy reopening. The rupiah has shaken off fears around the Fed’s impending taper — it’s the best performer among emerging markets so far in the second half.

With inflation under control, Governor Perry Warjiyo has room to keep policy rates at record lows for the rest of this year and through much of next.

Should the market turn volatile once the Fed begins tightening, Indonesia is banking on a robust trade balance — thanks to surging demand for palm oil and coal — and record forex reserves to defend its currency. Extending its $31 billion bond-buying program should also help Southeast Asia’s largest economy control borrowing costs.

What Bloomberg Economics Says:

“Bank Indonesia could justify another rate cut with the inflation outlook benign and recovery prospects dented by slow shots and the threat of more Delta outbreaks. But the rupiah remains vulnerable to selling pressure, precluding a cut.

That suggests the central bank will instead lean on bond purchases to support growth, making the next move in rates a hike — in 4Q 2022, or later.”

–Tamara Henderson

Central Bank of Turkey

* Current 1-Week Repo Rate: 18%
* Bloomberg Economics Forecast For End Of 2021: 16.5%
* Bloomberg Economics Forecast For End Of 2022: 14%

Turkey’s central bank unleashed a new bout of market turbulence by unexpectedly lowering interest rates last month, reflecting the long shadow cast by President Recep Tayyip Erdogan over monetary policy.

The surprise cut came despite rising prices and after Erdogan called for lower borrowing costs, making the lira the worst-performing emerging market currency of this year again.

Not delivering on the president’s unorthodox doctrine could have cost the central bank Governor Sahap Kavcioglu his job. Kavcioglu, who held rates steady for five meetings until last month, is the fourth governor since 2019, with the president having fired his three immediate predecessors.

Both headline inflation and a core gauge closely watched by the central bank accelerated in September but some economists say officials may continue cutting rates as early as this month as it no longer offers a clear guidance on the monetary policy implications of price growth.

What Bloomberg Economics Says:

“Turkey has embarked on an easing cycle while its peers are raising interest rates. Lower rates now risk higher rates in the future. In the meantime, the lira will continue to test fresh lows.”

–Ziad Daoud

Central Bank of Nigeria

* Current Central Bank Rate: 11.5%
* Bloomberg Economics Forecast For End Of 2021: 12%
* Bloomberg Economics Forecast For End Of 2022: 14%

Nigeria’s central bank will probably leave its key interest rate unchanged for the rest of the year as it looks to build growth momentum in Africa’s biggest economy.

Output undershot forecasts in the second quarter, suggesting the economy is struggling to recover from its biggest contraction in almost three decades in 2020. That forced the central bank to cut its economic growth forecast for this year to 2.86% from 3.15%.

Governor Godwin Emefiele has previously said the MPC can only shift to fighting inflation, which has exceeded the 9% top of the central bank’s target band for more than six years, once the economy’s recovery from last year’s coronavirus-induced contraction gathers pace.

What Bloomberg Economics Says:

“Nigeria’s inflation remains above target, but the central has made it clear it wants to see a solid recovery before switches to fighting inflation. We have pencilled in 4Q21 as the start of the hiking cycle, but a faster disinflation path and weaker than expected growth could stay the CBN’s hand.”

–Boingotlo Gasealahwe

OTHER G-20 CENTRAL BANKS

Bank of Korea

* Current Base Rate: 0.75%
* Bloomberg Economics Forecast For End Of 2021: 1%
* Bloomberg Economics Forecast For End Of 2022: 1.25%

The Bank of Korea is well ahead of the Federal Reserve and some other peers in developed nations in reining in pandemic-era stimulus after lifting its benchmark interest rate from a record low of 0.5% in August. The central bank has two rate decisions left this year and most economists believe it will go ahead with another 25 basis point hike in November rather than this week.

As the BOK embarks on the path to policy normalization, it is shifting its focus from fueling the economic rebound to curbing household debt at the center of financial imbalances. Governor Lee Ju-yeol, who steps down in March, has recently held met with financial regulators and agreed to coordinate policy responses with them.

What Bloomberg Economics Says:

“The Bank of Korea has entered a rate hike cycle with its August liftoff, and we see conditions ripe for another increase this year, most likely in November. Resilience in exports and a rebound in activity amid a rapidly rising vaccination rate suggest growth momentum remains solid. Financial imbalances, meanwhile, have also been growing, as have inflationary pressures.”

–Justin Jimenez

Reserve Bank of Australia

Current Cash Rate Target: 0.1%
Bloomberg Economics Forecast For End Of 2021: 0.1%
Bloomberg Economics Forecast For End Of 2022: 0.1%

Reserve Bank Governor Philip Lowe is betting the economy will see a swift rebound once virus restrictions across the population-heavy east coast ease as vaccination levels climb.

Even after the economy was battered by lockdowns in the third quarter, Lowe has forged ahead with a reduction in weekly bond purchases to A$4 billion ($2.9 billion) from A$5 billion and will review the pace again in mid-February, with another reduction likely if the recovery materializes.

As for the main cash rate, Lowe is sticking with forward guidance that suggests there won’t be any increase to the current record-low level of 0.1% until 2024 at the earliest. That’s fueling a surge in the nation’s already lofty home prices, spurring recent moves by the banking regulator to raise the minimum interest-rate buffer that lenders need to account for when assessing home-loan applications.

What Bloomberg Economics Says:

“With the RBA’s conditions for rate hikes — sustainable inflation within the target band — unlikely to be met until late 2024 the pace of monetary policy tightening in Australia is likely to remain gradual.

While we expect a prolonged tapering of bond purchases over 2022, policymakers focus is likely to switch towards regulatory restrictions to contain financial stability risks. An initial tightening of macro prudential policy is likely to be followed by further measures, potentially as early as 4Q 2021.“

–James McIntyre

Central Bank of Argentina

Current rate floor: 38%
Bloomberg Economics forecast for end of 2021: 38%
Bloomberg Economics forecast for end of 2022: 35%

Argentina’s central bank is a clear outlier in Latin America’s trend for rising interest rates. With President Alberto Fernandez’s government facing midterm elections in November, the central bank is printing money to finance public spending at the fastest pace so far this year. Even with annual inflation accelerating past 50%, central bank chief Miguel Pesce shows no signs of raising interest rates any time soon.

One reason is that higher rates would lead to greater interest payments on a ballooning debt load, further complicating government finances. Central bank debt has catapulted to 4.2 trillion pesos ($42.5 billion) from 2.4 trillion a year ago, according to Oct. 1 data.

What Bloomberg Economics Says:

“The BCRA has focused its efforts so far on strengthening the peso in real terms, in hopes this will help curb inflation. At the same time, it has left the policy rate virtually unchanged at 38% since March 2020, meaning deeply negative real rates for investors. That policy mix is unlikely to change before year-end, or to survive a deal with the IMF. A deal with the Fund may be hard to reach after a defeat in the Sept. 12 primaries changed the balance of power between President Fernandez and Vice-President Cristina Fernandez de Kirchner.”

–Adriana Dupita

G-10 Currencies And East Europe Economies

Swiss National Bank

* Current Policy Rate: -0.75%
* Median Economist Forecast For End Of 2021: -0.75%
* Median Economist Forecast For End Of 2022: -0.75%

The SNB’s monetary policy consists of negative rates and currency-market interventions, which central bank President Thomas Jordan says are the best policy tools in light of his country’s small bond market. Economists don’t expect that stance to change in the next year.

The global economic recovery from the pandemic has taken pressure off the franc — which investors typically flock to as a haven. That’s allowed the SNB to ease its foot off the gas on foreign exchange interventions. The spike in inflation seen in the euro area and the U.S. hasn’t been evident in Switzerland yet, with consumer price pressures forecast to remain well within the SNB’s definition of price stability.

Sveriges Riksbank

* Current Repo Rate: 0%
* Median Economist Forecast For End Of 2021: 0%
* Median Economist Forecast For End Of 2022: 0%

The Riksbank still expects to hold its benchmark rate at zero all the way through the third quarter of 2024, which would mean a full decade of keeping its benchmark rate at or below zero. That is despite a robust economic recovery and projections of inflation peaking above 3% in the coming months.

While rate-setters may pencil in a hike toward the end of 2024 at their November meeting, the majority view remains that the risks associated with tightening too soon are greater than holding on to an expansionary policy for too long.

After scaling back large-scale asset purchases implemented during the crisis, the Riksbank expects to keep its balance sheet largely unchanged through 2022 by compensating for bond redemptions.

Norges Bank

* Current Deposit Rate: 0.25%
* Median Economist Forecast For End Of 2021: 0.5%
* Median Economist Forecast For End Of 2022: 1%

Norway’s central bank is set for another 25 basis point interest rate hike before year-end after it last month delivered the first post-pandemic increase in borrowing costs among economies with the world’s 10 most-traded currencies.

Norges Bank also forecast a “slightly” elevated trajectory for the benchmark than signaled in June, cementing its outlier status among the rich peers in unwinding the crisis policies.

The oil-rich Nordic economy has recovered faster than most, while Governor Oystein Olsen hasn’t needed to deploy any unconventional tools as the government is relying more than ever on the world’s largest sovereign wealth fund for stimulus.

Policy makers see the risk of too-high price growth as “limited,” with core inflation at the slowest level since 2017.

Reserve Bank of New Zealand

* Current Cash Rate: 0.5%
* Bloomberg Economics Forecast For End Of 2021: 0.75%
* Bloomberg Economics Forecast For End Of 2022: 0.75%

After a false start in August, when a nationwide lockdown stayed its hand, the RBNZ raised the cash rate on Oct. 6 and signaled more hikes to come. Inflation is already in breach of the bank’s 1-3% target band and forecast to accelerate further. The labor market is tight, with unemployment at 4% matching its pre-pandemic low.

But much will depend on how the economy responds to New Zealand’s current coronavirus outbreak. Largest city Auckland remains in lockdown and the delta variant has spread to the neighboring Waikato region. The government plans to ease restrictions once enough people are vaccinated but with the virus circulating, the economy may not bounce back from a third-quarter contraction as rapidly as the RBNZ expects.

What Bloomberg Economics Says:

“The RBNZ has started tightening policy, responding to emerging signs of wage gains and inflation pressures following a rapid closed-border recovery. Further tightening is likely in our view, with a rate rise and harsher curbs on lending over coming months. But the entry of the delta variant in covid-free New Zealand looks set to derail the economy, along with the RBNZ’s projections for an aggressive lift in rates through 2022.”

–James McIntyre

National Bank of Poland

Current Cash Rate: 0.5%
Median economist forecast for end of 2022: 0.75% (survey conducted before last week’s surprise rate hike)

Poland has shifted into wait-and-see mode for monetary policy after shocking economists and investors alike with its first interest-rate hike since 2012 in early October. Central bank Governor Adam Glapinski says he “can’t say what the next move will be” as he assesses the effect of the step on the economy’s recovery.

But with inflation set to remain way above target and Prime Minister Mateusz Morawiecki taking an increasing interest in elevated consumer prices, another increase can’t be ruled out in the coming months. The pandemic, which is raging in other parts of eastern Europe, is likely to dictate the path ahead.

Czech National Bank

Current Cash Rate: 1.5%
Median Economist Forecast For End Of 2021: 2%
Median Economist Forecast For End Of 2022: 2.5%

The Czech central bank has accelerated its campaign against inflation, with a surprising 75 basis-point rate increase on Sept. 30 marking its biggest move in 24 years. That triggered a rare rebuke from the government, which fears that higher borrowing costs will undermine the economic recovery.

The bank worries that the fastest inflation in 13 years, combined with the EU’s lowest jobless rate, will boost wage demands. It pledged more rate hikes this year and eventually wants to bring the benchmark to “normal levels” of 2.5% to 3%.

“We simply need to send a strong signal to people and the economy that we won’t allow inflation expectations to become detached from our target,” Governor Jiri Rusnok said after the September decision.

Updated: 10-9-2021

BOE’s Saunders Says Markets Right To Price In Quicker Tightening

A Bank of England policy maker said markets are right to price in an earlier interest-rate hike than previously expected as inflation accelerates.

Michael Saunders, a member of the central bank’s Monetary Policy Committee, was quoted as telling the Telegraph he’s concerned that capacity pressures and higher pay growth are driving an inflation pickup that “could become more persistent unless monetary policy responds.”

“I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously,” said Saunders, one of two policy makers who voted last month to end the BOE’s bond buying program immediately.

Saunders has emerged as one of the more hawkish BOE officials in the past few months and his comments will vindicate investors who are betting on an imminent rate hike, though he said he’s wary of telegraphing the bank’s intentions “too precisely.”

BOE Governor Andrew Bailey warned earlier Saturday of a potentially “very damaging” period of inflation for British consumers, comments that are likely to boost bets that he favors an imminent increase in interest rates.

In an interview with the Yorkshire Post, Bailey said he’s concerned that prices have accelerated beyond the BOE’s 2% target, and warned that it will likely even exceed the central bank’s latest forecast.

“We have got to, in a sense, prevent the thing becoming permanently embedded because that would obviously be very damaging,” he said. The BOE said last month inflation would probably exceed 4% in the last quarter of this year.

Investors have loaded up on bets on faster BOE rate hikes in recent weeks. Markets are almost-fully pricing in the first move by the end of this year and see the rate, now at 0.1%, hitting 0.75% in 2022.

In its last meeting, the policy committee raised the possibility that it could act as early as November if deemed necessary.

Crucially, the governor also said he doesn’t anticipate a further increase in unemployment, the Yorkshire Post reported, even after the government ended its furlough program last month. Economists widely expect the BOE to weigh jobs data following the end of the program before deciding whether to raise borrowing costs.

‘Almost Unprecedented’

A flurry of news last week undercut the BOE’s original view that much of the jump in prices will prove transitory, and comes amid growing bets that spiking inflation will force the BOE to hike interest rates in the near future.

“This has been an almost unprecedented set of events,” Bailey said. “They are not over yet, that we are learning. We have to manage our way through them, and we will do that.”

Bailey’s comments come after the BOE’s new Chief Economist Huw Pill said this week that the current spike in inflation in the U.K. will last longer than originally thought.

Codelco Raises Europe Copper Premium By 31% In Bullish Signal

Codelco offered to supply copper to European customers at a $128 premium over futures next year, signaling that the world’s biggest copper miner expects strong demand to continue even as growth headwinds swirl.

Codelco boosted its annual premium by $30 a ton, according to a person familiar with the matter who asked not to be identified discussing private information. The offer is $5 higher than the premium announced by leading European producer Aurubis.

The miner made its offer at the start of London Metal Exchange Week, when producers, consumers and traders convene in the U.K. capital to thrash out supply deals for the coming year. While copper demand has been booming, rampant inflation and the burgeoning global energy crisis are casting a pall over the growth outlook. Rising freight rates have also raised costs for suppliers like Codelco.

One key risk for manufacturers is that the global economy shifts into a period of stagflation, where demand in sectors like consumer goods and construction plunges while raw materials prices remain stubbornly high.

Even so, with unprecedented stimulus funding now feeding its way into metals-intensive renewables projects, manufacturers are also conscious of the risk that demand will outpace supply. Nexans, a leading cable-maker, has said it will bulk up in copper recycling to insulate itself against future shortages.

The Codelco premium was earlier reported by Fastmarkets.

Updated: 10-12-2021

IMF Cuts Global Growth Forecast Amid Supply-Chain Disruptions, Pandemic Pressures

Group also raises its inflation outlook, urging policy makers to stand ready to take swift action.

The International Monetary Fund lowered its growth forecast for the world economy for this year, citing supply-chain disruptions in rich economies and global-health concerns caused by the spread of the contagious Covid-19 Delta variant.

The group also raised its inflation outlook, urging policy makers to stand ready to take swift action if the recovery strengthens more quickly than expected or inflation risks become pronounced. Prices from food to medicine to vehicles have risen world-wide, threatening the global recovery after the pandemic wiped out businesses and jobs.

The IMF, a group made up of 190 member countries, promotes international financial stability and monetary cooperation. It also acts as a lender of last resort to countries in financial distress.

In the IMF’s latest World Economic Outlook report, released Tuesday, the group’s economists say the foremost policy priority is to vaccinate an adequate number of people in every country to prevent dangerous mutations of the virus.

They stressed the importance for major economies to fulfill pledges to provide vaccines and financial support to international vaccination efforts before new variants knock a tenuous recovery off track. “Policy choices have become more difficult…with limited room to maneuver,” the IMF economists said in the report.

The IMF cut its global growth forecast for 2021 to 5.9% from 6% in its July report, a result of a reduction in its projection for advanced economies to 5.2% from 5.6%. The reduction mostly reflected problems with a global supply chain that caused a mismatch between supply and demand.

For emerging markets and developing economies, the outlook improved. Growth in these economies is pegged at 6.4% for 2021, up from an estimate of 6.3% in July. The uptick reflected stronger performances by some commodity-exporting countries amid rising energy prices.

The group maintained its view that the global growth will moderate to 4.9% in 2022.

Among leading economics, the growth outlook for the U.S. was trimmed 0.1 percentage point to 6% this year, while the projection for China also was reduced by 0.1 percentage point to 8%.

Several other major economies saw their outlook cut, including Germany, whose economy now is projected to grow 3.1% this year, down 0.5 percentage point from its July forecast. Japan’s outlook was lowered by 0.4 percentage point to 2.4%.

While the IMF maintains the view that inflation will return to pre-pandemic levels by mid-2022, it also warns that the negative impact of inflation could grow further, if the pandemic-related supply-chain disruptions turn out to be more damaging and long-lasting. That could result in earlier tightening of monetary policy by central banks, holding back recovery.

IMF economists say that inflation outlook is “highly uncertain” due to the unprecedented nature of the current recovery. Despite the upward revision in its price projections, the forecast for inflation to return to pre-pandemic levels is based on an ample labor supply in advanced economies that should weigh on wages.

The IMF economists warn, however, some factors could add persistent inflationary pressure. Among them: a shortage of housing boosting real-estate prices and rent ahead of new construction. Higher import prices of food and oil will also keep consumer prices elevated in emerging and developing countries.

Prolonged supply disruptions too might push businesses to increase prices, leading to stronger demand for wage increases from workers.

“Should households, business and investors begin anticipating that price pressure from pent-up demand…to persist, there is a risk that medium-term inflation expectations could drift upward and lead to a self-fulfilling further rise in prices,” IMF economists wrote. They added that, for now, there are “no signs of such a shift.”

Supply shortages caused by logistical bottlenecks, combined with stimulus-fed consumer appetite for goods, have caused rapid increases in consumer prices in the U.S., Germany and many other nations, the IMF says.

Food-price increases have put particularly grave burdens on households from poorer nations. The IMF’s food-and-beverage price index rose 11.1% between February and August, with prices of meat and coffee rising 30% and 29%, respectively.

The IMF now expects consumer-price inflation in advanced economies to reach 2.8% in 2021 and 2.3% in 2022, up from 2.4% and 2.1%, respectively, in its July report. Inflationary pressure is even more pronounced in emerging and developing economies, with consumer prices rising 5.5% this year and 4.9% next year.

“While monetary policy can generally look through transitory increases in inflation, central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery,” Gita Gopinath, IMF economic counselor and director of research, wrote in the report.

While the increases in commodity prices have bolstered some emerging and developing economies, many of the world’s poorest countries have been left further behind, as they struggled to gain access to vaccines needed to open up their economies.

More than 95% of people in lower-income nations remain unvaccinated, a contrast to the vaccination rate of nearly 60% in rich countries.

The IMF economists urged major economies to provide ample liquidity and debt relief for poorer nations with limited policy resources. “The dangerous divergence in economic prospects across countries remains a major concern,” Ms. Gopinath says.

Updated: 12-11-2021

Massive U.S. Debt Serves As Catch 22 For Powell In Attempt To Fight Inflation

Raise interest rates and crash equities and other markets or keep interests artificially low and postpone true economic recovery.

The U.S. went on a borrowing binge last year and the hangover could make it harder for the Federal Reserve to fight inflation without crashing the economy.

Corporate debt has surged $1.3 trillion since the start of 2020 as borrowers took advantage of emergency Fed action as the pandemic spread, slashing interest rates and backstopping financial markets to keep credit flowing. More debt held by more companies suggests potential risks as borrowing costs rise from currently low levels.

That could create financial stability concerns for Fed Chair Jerome Powell and his colleagues as they debate removing pandemic support in the face of what a report Friday showed were the hottest price rises in almost 40 years. And a tough task: Not since Alan Greenspan’s time has the U.S. central bank tried to navigate the economy back to price stability from too-high inflation.

Powell’s challenge is to try to curb price pressures without large costs to employment or growth, a move that would likely anger both political parties and blotch his record with the first Fed-assisted hard landing since the 1990-1991 downturn.

“They are in a difficult position,” said Jeremy Stein, professor of economics at Harvard University and a Fed governor from 2012 to 2014. If inflation is more persistent “and they really have to hike rates significantly, you can imagine what happens to asset valuations: There’s just a tremendous amount of interest-rate sensitivity in markets.”

The Fed’s Financial Stability Report on Nov. 2 noted that key measures of vulnerability from business debt, including leverage and interest cover ratios, were back at pre-pandemic levels.

But it also discussed risks to asset prices from a sharp rise in interest rates that could slow growth and lead to harmful losses.

Intense market volatility has swayed the Powell Fed before. Officials paused after raising rates in late 2018 in the face of severe swings in stocks and bonds and cut rates three times the following year.

Financial stability remains on policy makers’ minds. Minutes of their November meeting show that a number of them raised it during their deliberations, as they decided to start scaling back bond buying.

Powell said last week that officials would consider accelerating their reduction of asset purchases when they meet Dec. 14-15 to end the program a few months earlier than mid-2022, as initially planned.

Wrapping the taper up sooner gives the Fed scope to raise rates earlier and faster if inflation fails to ease next year as expected. But record levels of debt may force them to temper their actions.

More Slowly

“They may move a little bit more slowly to see how things develop, and whether problems do come up in the U.S. — at least in the non-financial corporate business sector,” said William English, professor at Yale School of Management and a former senior Fed economist. “That will be just another source of uncertainty for monetary policy.”

The Fed’s emergency response to the pandemic included unprecedented support for the corporate sector. And while the intervention wasn’t massive compared to some of the Fed’s pandemic programs, the backstop fueled a record borrowing surge at historically low rates.

The combination has pushed investment-grade bond duration, the so-called sensitivity to interest rates, to near-records and boosted five-year refinancing requirements to all-time highs of around $2.5 trillion, according to Moody’s Investors Service.

If higher rates and wider corporate borrowing spreads throttle access to credit, it could push more firms into bankruptcy.

“There are negative aspects when you encourage people to borrow, but then later feel that you can’t raise rates because so many people borrowed,” said Howard Marks, co-founder of Oaktree Capital Group. “That’s something of a trap.”

To be sure, big firms that used the opportunity to issue longer-dated bonds at lower rates have strengthened their balance sheets.

Higher corporate profits would also ease the strain, though these could come under pressure if the economy slows in response to tighter monetary policy.

But while many firms took advantage of the low rates, it wasn’t universal. Nearly 500 companies are expected to try to tap markets to refinance next year, according to S&P Global Ratings. Medium and small-sized firms whose loans don’t tend to be rated would struggle even more, according to Fitch Ratings.

Government and household debt also surged during the pandemic. While those segments look relatively healthy, rising borrowing costs could make servicing the federal debt more politically fraught and pressure lower-income Americans.

Some see the higher debt burden limiting how far the Fed will be able to raise rates.

“Financial conditions are relatively sensitive to what the Fed does. And the pandemic potentially made them more sensitive because we have seen debt increase,” said Tiffany Wilding, an economist at Pacific Investment Management Co. “That would suggest to us that probably the top of this hiking cycle, the terminal rate of this hiking cycle, could even be less than what it was in the last cycle.”

Corporate America also includes a number of weaker companies –- sometimes called zombie firms because they don’t generate enough cashflow to service their debt payments — which could be vulnerable as borrowing costs head back up.

Their number jumped during the pandemic to 772 among the publicly-traded firms in the Russell 3000, according to data compiled by Bloomberg. While the tally has shrunk to 621, there are still more than an additional 100 of them compared to before the pandemic.

In addition, the average credit rating of companies has been declining, according to Moody’s — an early warning that some of them could run into problems with paying what they owe if debt service costs rise.

“The economy is more vulnerable than it has ever been before to rising interest rates,” said Torsten Slok, chief economist at Apollo Global Management. “How much can the Fed raise rates? And the answer is, they can actually not raise rates that much.”

Updated: 12-14-2021

Wholesale (AKA Producer) Prices Rise At The Fastest Pace On Record

Another Sign Inflation Is Getting Hotter!!!

Prices that suppliers charge businesses and other customers jumped 9.6% last month from a year ago, the most on record.

Prices that suppliers are charging businesses and other customers leapt in November, signaling that broad-based price pressures are still building throughout the U.S. supply chain.

The Labor Department said Tuesday that its producer-price index rose 9.6% in November from a year earlier, the most since records began in 2010. The so-called core PPI, which excludes often volatile food and energy components, climbed 7.7% from a year ago, also the highest on record.

The higher-than-expected producer-price numbers suggest that consumer inflation, which hit a nearly four-decade high of 6.8% last month, will stay elevated into 2022 as price pressures persist.

The index, which generally reflects supply conditions in the economy, rose 0.8% from October, an acceleration from the 0.6% gain in each of the previous three months. Higher prices for energy, wholesale food, and transportation and warehousing contributed to the pickup in inflation.

“This is a testament to the fact that inflation continues to broaden out,” said Stephen Stanley, chief economist at Amherst Pierpont.

Persistently high prices in large part reflected clogged supply chains, as manufacturers scrambled to keep up with unusually strong consumer demand. The rise in prices of goods continued to outpace that for services, as consumer spending on goods remains elevated, while that on services is up just slightly from pre-pandemic levels.

Prices for goods, excluding food and energy, climbed 0.8% in November from October, faster than the 0.6% increase the previous month. The services index advanced 0.7% on the month, up from 0.2% in October, driven in part by a pickup in hotel room rates and airfares.

The easing of inflation for goods used to make other products, though still high, signaled that producer-price inflation is nearing its peak, said Gus Faucher, chief economist at PNC. “PPI inflation will slow in 2022 as prices for energy and other raw materials decline thanks to greater production, weaker demand, and a gradual waning in supply chain problems,” said Mr. Faucher. “But PPI inflation will remain above its long-run levels due to continued strong demand for some goods and services and higher wages.”

Along with last week’s consumer inflation data, today’s producer data add to the case for Fed officials to speed up plans for winding down their stimulus efforts as the Federal Open Market Committee meets today and tomorrow. A faster taper would pave the way to raise interest rates in the spring to curb inflation. “The [Federal Reserve] should be very concerned,” said Mr. Stanley.

U.S. Producer Prices Post the Biggest Annual Gain Since 2010, Fanning Inflation

* PPI Climbs 9.6% From Year Earlier, Most In Data To 2010
* Labor Department Data Show Broad Advance In Goods, Services

Prices paid to U.S. producers posted a record annual increase of almost 10% in November, a surge that will sustain a pipeline of inflationary pressures well into 2022.

The producer price index for final demand increased 9.6% from a year earlier and 0.8% from the prior month, Labor Department data showed Tuesday. Both advances topped economists’ forecasts.

The annual advance was the largest in figures back to 2010. Stocks retreated as the data reinforced expectations that Federal Reserve policy makers will tighten monetary policy next year.

Excluding the volatile food and energy components, the so-called core PPI increased 0.7% and was up by a record 7.7% from a year ago.

Prices of goods and services both advanced last month. The report captures changes in prices paid to producers as well as margins received by wholesalers and retailers.

Materials costs have risen rapidly this year amid transportation bottlenecks, robust demand, and labor constraints. Many businesses have successfully passed those added costs on to customers through higher prices, and the latest report suggests additional consumer price increases in the coming months.

Consumer Inflation

Data out last week showed the consumer price index rose 6.8% last month from a year ago, the fastest annual pace in nearly 40 years. While first concentrated in a handful of categories associated with the economy’s reopening, inflation has broadened out.

The larger-than-expected, sustained increase in inflation has put pressure on policy makers to act. The Fed, which will wrap up its final meeting of the year Wednesday, is anticipated to accelerate the wind down of its bond buying program, an action that would allow the central bank to begin increasing interest rates next year.

The persistence of inflation in recent months has proven to be a major political headache for President Joe Biden, who’s trying to salvage his roughly $2 trillion tax and spending plan amid concerns from a key senator, West Virginia’s Joe Manchin, that the package will spur even more price increases.

Producer prices excluding food, energy, and trade services — a measure often preferred by economists because it strips out the most volatile components — rose 0.7% from the prior month. Compared with a year earlier, the gauge jumped a record 6.9%.

Goods prices increased 1.2% in November from a month earlier, reflecting broad advances that included iron and steel scrap, gasoline, and fruits and vegetables.

Services costs rose 0.7%, in part reflecting a jump in prices for investment portfolio management.

Costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, rose 1.5% from a month earlier. Compared with a year earlier, the measure jumped 26.5% — the largest since 1974.

Updated: 12-19-2021

Central Banks Created Inflation Through Massive Money-Printing While Blaming Omicron

Latest Covid-19 variant seen as having less effect on growth, more pressure on prices than previous waves.

The Omicron variant is circling the globe, closing borders and sparking new restrictions on economic activity. Yet central banks, instead of loosening monetary policy to prop up their economies as they did at the start of the pandemic, are moving to unwind stimulus and raise interest rates.

The moves reflect a new thinking among policy makers about the pandemic’s economic effects: Central-bank officials worry that rather than simply threatening to curtail economic growth, a surge in Covid-19 cases could also prolong high inflation.

In the past week, the Federal Reserve, the Bank of England and the European Central Bank all moved to tighten monetary policy in response to inflation concerns.

When the pandemic first became widespread, in early 2020, governments locked down their economies. Consumer spending fell sharply, employers shed workers and prices fell. Within a few months, the rise of e-commerce and remote working allowed the economy in many developed countries to recover rapidly. With mass vaccinations, that recovery has continued this year.

Now, new case surges are having much less severe impacts on spending and job creation. Instead, they are threatening to prolong supply-chain disruptions and keep inflation elevated.

“What we saw in the early stages of the pandemic is that demand initially dropped a lot more than supply so it ended up being deflationary, particularly because of pretty stringent lockdowns,” said Paul Ashworth, chief North America economist at Capital Economics.

Today, with governments reluctant to impose new lockdowns, it is the other way around, he said.

“Supply could potentially be hit more than demand and therefore it becomes inflationary rather than deflationary this time,” he said.

Scientists are still studying the effects of Omicron. So far, it appears to spread faster than earlier variants and is able to evade immunity from vaccines and past infection, but it might cause milder symptoms.

Speaking to reporters following the Dec. 14-15 meeting, Fed Chairman Jerome Powell said, “Wave upon wave, people are learning to live with this…The more people get vaccinated the less the economic effect.”

For instance, new daily cases peaked at more than 31,000 a day in the first two months of the pandemic last year. As states imposed stay-at-home orders, that led to a record 31.2% annualized decline in gross domestic product. By contrast, cases peaked at around 250,000 a day in the first quarter of 2021 but the economy grew 6.3%.

Governments have imposed fewer, and more targeted, restrictions with each wave. Moreover, many workers and businesses have adapted to outbreaks, such as reverting to remote work.

Nonetheless, economists and investors do expect Omicron to have some negative impact on growth, particularly with international travel. In recent days several European countries have announced new restrictions on activity. Economists at Pantheon Macroeconomics brought down forecast U.S. growth to 3% annualized in the first quarter from 5%. They see most of that decline being made up in subsequent quarters.

Even as the virus’s impact on growth has eased, its impact on inflation pressure appears to have flipped, from downward to upward. Covid-19 prompted consumers to spend less on in-person services such as amusement parks and more on durable goods such as appliances and furniture.

Closed factories and ports in China made it harder for imports to reach the U.S. And fear of getting sick kept people from leaving home, leading to a labor shortage and rising wages. About 3.2 million adults said in early September—when the Delta wave was at its height—that they weren’t working because they were afraid of getting sick, according to census data. That was up from 2.8 million before the wave.

Economists at Goldman Sachs on Friday raised their core-inflation forecast to 3.4% in June 2022 from 3.25% based on the prospect of Omicron-related factory shutdowns in Asia and higher housing inflation.

Consumer prices in the U.S. rose 6.8% in November over the previous year, the biggest jump in almost four decades. In response, Fed officials said they would likely end their bond-buying stimulus program in March of next year and penciled in three quarter-percentage-point interest-rate increases by the end of 2022.

Increasingly, Federal Reserve officials are worried the new Omicron variant could exert even more upward pressure on inflation.

On Friday, Fed governor Christopher Waller said, “We…do not know if Omicron will exacerbate labor and goods supply shortages and add inflation pressure.”

The shift in officials’ thinking has been under way for a few months. Mr. Powell told Congress in November that fears surrounding Omicron “could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”

If that is the case, it could push the Fed to raise rates faster than anticipated, said Robert Dent, senior U.S. economist at Nomura Securities, who expects four rate increases next year.

“They know now this is an inflationary phenomenon and inflation is already up pre-Omicron, so it reinforces this tendency to be hawkish,” he said.

In the U.K., where Omicron has pushed new daily cases to record highs, the government of Prime Minister Boris Johnson has introduced rules that require proof of vaccination for entry to nightclubs and some other venues, although those restrictions are milder than those during some previous surges.

But the Bank of England, responding to elevated inflation, raised a key interest rate last week for the first time since the onset of the pandemic.

“The experience since March 2020 suggests that successive waves of Covid appear to have had less impact on GDP, although there is uncertainty around the extent to which that will prove to be the case on this occasion,” policy makers said.

The Bank of England had previously assumed that receding Covid-19 infections would alleviate upward pressure on goods prices by rebalancing consumers’ spending toward services.

With renewed social distancing, “this rebalancing was now more likely to be delayed and so global price pressures might persist for longer,” minutes to the bank’s meeting said. “China’s current zero-Covid strategy could lead to renewed disruptions at Chinese factories and ports, and could affect shipping costs,” the minutes added.

Against that, overall demand, in particular for services, could slow, the minutes said, leaving the net impact on inflation unclear.

The European Central Bank also believes that the new variant’s impact is likely to be much less severe than during the first wave. Thursday it announced the end of a program of bond purchases—the Pandemic Emergency Purchasing Program—that was intended to offset some of the negative economic consequences of Covid-19.

But ECB President Christine Lagarde told reporters after the meeting that she was closely watching how Omicron would affect supply.

“The balance between the inflationary or deflationary impact that Omicron will have is still totally uncertain,” she said.

Updated: 2-10-2022

No More Steak? American Consumers Try To Beat Inflation

When prices on food and other basic goods go up, people adapt their spending.

Glance through recent earnings reports, and it looks like Americans are breezing through the barrage of price increases coming their way.

Companies including Procter & Gamble Co., Hershey Co. and PepsiCo Inc. have all seen little impact on sales from the inflation they’ve passed onto consumers to cover their own soaring costs.

But companies shouldn’t pat themselves on the back just yet. There are signs that people are starting to change their habits to deal with stretched budgets. With more price hikes expected over the coming months, this could be the beginning of shoppers pulling in their purse strings, with far-reaching consequences for manufacturers and food retailers alike.

When prices go up, consumers adapt their spending. This is known in the trade as “dialing out” inflation. So even though food prices rose by almost 7% in January, according to Labor Department data released Thursday, a bit of savvy shopping might mean grocery bills increase by only half that rate.

This dialing out is playing out in several ways. For one thing, Americans are buying less. According to data provider IRI, the dollar value of the average shopping basket has risen slightly over the past year. But the number of items in each basket has contracted.

While consumers are spending more on their groceries, they are cutting back on what they regard as non-essential. That’s different for each family — for some, it could be snacks; for others, it’s fresh flowers or items such as bottled water that can easily be substituted.

What this means for retailers and manufacturers is that the amount of goods they are selling will come under pressure, although this should, in theory, be compensated for by higher prices. On Thursday, British consumer goods group Unilever Plc said that while it raised prices by almost 5% in the final quarter of 2021, the amount of Ben & Jerry’s ice cream and Vaseline moisturizer it sold was flat. This could be a harbinger of demand getting worse across the consumer sector.

What’s more, shoppers don’t just buy less — they trade down too.

When people were forced to stay home, they indulged in pricier products from fancy coffee to indulgent desserts. Now they face the twin pressures of more opportunities to spend and rampant inflation. The trend toward bougie items is losing steam. Cheaper, mainstream products are gaining ground, according to IRI.

Many Americans are even switching out of big brands and into supermarkets’ cheaper private-label products. This is a direct response to rising prices. The categories seeing the most dramatic inflation — such as oils and bacon — are also those where private-label ranges are picking up share.

Consumers also tend to cut back where prices ratchet up. For instance, whenever meat becomes costlier, as it did around a decade ago, families substitute with cheaper proteins or go even cheaper with potatoes and pasta.

Today, meat is one of the food categories seeing the highest price increases as well as a decline in the volume of sales, according to IRI. Some shoppers are switching out of the priciest cuts — beef and pork — and into chicken, where prices are rising more slowly, as well as processed meat.

Unfortunately for the fake-meat makers, people aren’t reaching for meat substitutes. Plant-based alternatives tend to be more expensive after all.

Another consumer reaction to inflation is to shop around. People will visit more stores to find the best deals, and they’ll turn to dollar shops and the so-called hard discounters.

Some Americans avoided the German no-frills supermarkets, Aldi and Lidl, and their U.S. cousin Trader Joe’s, during the pandemic, because of their smaller stores and limited ranges. Many preferred to make a trip to a larger retailer, such as Walmart Inc., where they could do a big shop once a week.

But customers are returning to the budget-friendly options, according to Placer.ai, a foot-traffic analysis company. Some of the recent gains at Aldi and Lidl are due to the fact that they are expanding across the U.S. But the uptick in foot traffic towards the end of last year coincides with inflation kicking in.

Mainstream food retailers such as Walmart, Target Corp. and Kroger Co. will need to watch the discounters carefully. Aldi and Lidl also primarily sell private-label products, so an acceleration in their sales could hurt the big branded manufacturers too.

These are just the first indications of consumers cutting back, trading down and shopping around. If they turn into a headlong rush into frugality, companies’ future earnings reports won’t be as positive.

Inflation And Other Woes Are Eating Your Girl Scout Cookies

This year, scouts trying to meet their targets have felt the effects of supply-chain woes and price increases; ‘Do you have cookies you can spare?’

Girl Scouts are earning a new badge in global economic turmoil.

A month into national cookie-selling season, scouts have felt the effects of supply-chain woes and inflation. Some troops are grappling with shortages of flavors from S’mores to Samoas, plus the occasional angry grown-up customer ticked off about price increases, sometimes from $4 to $5 or $6 per box.

The bakery that supplies cookies to 75 out of the 111 geographic areas, or councils, where Girl Scouts sell, is experiencing production delays, the Girl Scouts of the USA says. “We anticipate some councils will be largely unaffected, while other councils and girls may not reach their cookie goals,” the organization said of Little Brownie Bakers, which is based in Louisville, Ky. Little Brownie Bakers didn’t respond to a request for comment.

Cookie shortages are undermining fundraising efforts for regional councils that rely on sales of the treats for roughly 70% of their operating revenue, or about $800 million annually. Each Girl Scout troop decides how to spend its cookie earnings, with the money typically going to Scout activities, charitable projects and financial aid.

Girl Scouts of the USA is focused on ensuring the existing supply of cookies is evenly distributed among troops, says communications chief Kelly Parisi. She says the national arm of the organization can’t fill holes in troops’ budgets.

Like lots of in-person businesses that went digital in the pandemic, the Girl Scouts took to more cookie selling online when Covid kept them from going door-to-door. Sales remained relatively steady at just under 200 million boxes, the Girl Scouts organization says.

Ten-year-old Bailey Laycook set a goal of selling 1,000 boxes this year and has sold 420. She has had to hold off on soliciting sales in person while she waits on more inventory. Cookie season in Los Angeles, where Bailey lives, runs for only another month. (Cookie season is recognized nationally from January through April, but local timing varies.)

“I’m worried people who have a goal over 700 won’t make it to their goal because of this shortage,” the fifth-grader says. “If the cookies run out, the customers will be waiting.”

Some councils are extending the selling season while waiting on more inventory. For cookie lovers who ask why they can’t order their favorites, Bailey is ready with an explanation: “Sorry, we’ve sold too many that we can’t supply any more. Being the popularest cookies means that they run out way too quickly,” she says.

Bailey’s mother, Ellie Laycook, oversees cookie sales for Bailey’s troop. She says many local distribution centers, also known as “cookie cupboards,” have been struggling to keep up with demand. She recently drove 40 minutes to the one cupboard in the area that had the seven flavors she needed in stock. She snagged some of the last boxes of peanut butter Tagalongs and Samoas.

“There’s been a chain of troop leaders saying, ‘I heard from this other troop leader that you have cookies. Do you have cookies you can spare?’ ” the 36-year-old religious-school director says. So far, her troop has helped five other groups who didn’t have enough to fulfill their orders. “It’s part of the Girl Scout Law,” she says.

Bailey had been trying to push the less-popular cookies she still has in stock such as shortbread Trefoils and Do-si-dos on wary customers. Her strategies: making drawings of the cookies on the sidewalk with an arrow pointing to her stand and having her 6-year-old brother hold a sign that reads “Cookie Crossing.”

“We encourage everyone to try different flavors if their first choice isn’t available, and we appreciate their support of girls’ entrepreneurship,” Girl Scouts of the USA says.

The newest Girl Scout cookie, a brownie-inspired dessert called an Adventureful, has been particularly hard to find. Many troops, including Bailey’s, sold out of all their Adventurefuls in a couple of days. The Girl Scouts organization says new cookies typically sell out quickly due to increased excitement and the difficulty of anticipating demand.

Girl Scouts often earn financial literacy badges during cookie season to sew onto their uniforms, just like they might for good sportsmanship or first-aid skills. One badge, called Cookie CEO, teaches Brownies how to run their own businesses. Another, Cookie Market Researcher, prompts Cadette-level scouts to “investigate what sets your product apart.” A Budgeting badge sponsored by the Federal Reserve Bank of St. Louis asks kids to “Define and give examples of opportunity cost.”

East Rochester, N.Y., troop leader Samantha Cipolla has given her group of 10- and 11-year-olds lessons on inflation to explain why cookies have gotten more expensive.

“It’s insane to watch adults interrogate children about pricing,” the 30-year-old home health aide says of potential buyers hectoring little girls. “We just told them there’s a large demand for cookies and there’s only so many you can sell in a period of time. So when you need more of something, there actually has to be some.”

Her daughter, Lily Cipolla, hasn’t necessarily enjoyed the econ lesson. “It’s boring,” the fifth-grader says.

Cricket Winters, a first-grader in Tallahassee, Fla., says her dad has been teaching her why grocery store shelves are emptier than usual and why she could struggle to meet her goal of selling 600 boxes. “Workers are getting sick and they have to go home and there’s less supply,” she says.

Cricket has been running a stand outside a church since Saturday, when cookie season started. “We have to sell them early so that we have enough,” she says. She accepts cash or Venmo.

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