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Age of inflation in US will last much longer than pandemic spike



Rich Miller, Bloomberg

14 May, 2022, 09:10 pm

Last modified: 14 May, 2022, 09:34 pm

Photo: Bloomberg

Photo: Bloomberg

Photo: Bloomberg

The US is heading into a new era of elevated inflation that’s likely to persist long after the red-hot prices of the past year or so come off the boil.

Deep-seated trends in trade and demographics helped keep inflation in a comfort zone for decades, but both are now pushing in the opposite direction. Globalization was fraying even before pandemic and war made things worse. Growth in the world’s labor force has slowed.

Then there’s the looming cost of transition to net-zero carbon emissions — likely to push all kinds of prices higher in the years ahead -– and the prospect of a sustained run-up in rents due to America’s dearth of affordable housing.

It all adds up to a changed landscape. Yes, inflation probably will retreat from near four-decade highs, as supply-chain snafus unwind and economic growth slows in response to interest-rate increases by the Federal Reserve. But it may prove stubbornly higher than the 1.5%-to-2% range that American consumers, businesses and investors grew accustomed to before the pandemic spike.

“The long era of low inflation, suppressed volatility, and easy financial conditions is ending,” said Mark Carney, who ran the central banks of Canada and the UK The economics of the coming period will be “more challenging,” he said.

In this new environment, borrowers from homebuyers to the US Treasury will have to pay more. There’ll be fewer jobs for workers, as the Fed puts a squeeze on labor markets — and more risks for investors, who’ll have to factor in a central bank more preoccupied with cooling inflation than promoting economic growth. Politicians may see more pushback against their spending plans, and they’ll face voters increasingly unhappy about rising costs of living.

‘Old Testament Mode’

Fed officials have hinted that they see lasting shifts ahead. 

Chair Jerome Powell said last month that globalization has slowed down — and that if goes into reverse, “it would be a different world.” Richmond Fed chief Tom Barkin cited the potential for “more medium-term inflationary pressure” that the central bank will have to take into account as it strives to hit its 2% target.

Where inflation ultimately settles will largely depend on what the Fed -– and the American public –- are willing to tolerate.

The late Paul Volcker showed in the 1970s that the Fed has the tools to rein in inflation, but at a high cost. To break the back of double-digit price gains, he drove the economy into a deep recession and pushed unemployment above 10%.

“If you ask me where inflation is going to be in the next 10 years, I’m going to tell you it depends centrally on what the Fed’s preferences are,” said JPMorgan Chase & Co. chief economist Bruce Kasman. “And the Fed’s preferences have to do with societal preferences.”

Kasman reckons that Powell & Co. would be comfortable with inflation landing in a “sweet spot” around 2.5%. 

Anything much higher, he said, would likely tip the Fed into “Old Testament mode.” Out would go the forgiving approach to missed inflation targets — to be replaced by “a vengeful central bank that starts to smite us.” In that scenario, recession risks would rise significantly.

Following are some of the long-run inflationary forces that the Fed will have to contend with:


Almost 20 years ago, at the Fed’s Jackson Hole symposium, Harvard University professor Kenneth Rogoff pointed out that the removal of trade barriers was helping to deliver lower inflation worldwide. Now Rogoff worries that’s going into reverse, under pressure from a hot war in Ukraine and a Cold War-style contest between the US and China.

It started with the tariffs President Donald Trump imposed on China. They added about a quarter of a percentage point to US inflation in 2018, analysts at the Peterson Institute for International Economics estimate.

Since then, both the pandemic and Russia’s invasion of its neighbor have accelerated efforts by governments and multinational firms to make their supplies –- whether personal protective equipment or microchips — more secure. Which likely means more costly. 

That’s a big deal. Before last year’s pandemic-driven surge, US consumer prices for goods (not counting food and energy) were basically unchanged since China entered the World Trade Organization some 20 years earlier. What inflation there was largely came from services, where prices were rising at an annual rate of about 2.7% over the period.

If waning globalization means that goods prices are now set to rise by 1% to 2% a year, as Moody’s Analytics chief economist Mark Zandi expects, then service-price inflation will have to come down if the Fed wants to meet its 2% target. That might mean crunching a sector of the economy that employs the vast majority of American workers.

Where Are the Workers?

In the period encompassing the collapse of the Soviet bloc and China’s arrival in the WTO, more than three-quarters of a billion low-paid workers joined the labor force of the globalized economy. 

That’s credited with helping to suppress inflation by keeping manufacturing costs down. But the process may have already played out. China’s labor force has peaked, after expanding by 10% from 2000 to 2020, according to the World Bank. There’s no comparable pool of untapped workers out there.

Demographics in the US, too, herald more inflationary pressure.

In part due to Covid-19, population growth last year was the slowest since the nation was founded in 1776. And the ongoing retirement of the baby boom generation, coupled with tighter curbs on immigration, is limiting the number of Americans available for companies to hire -– which could push up wages for those who are. Unit labor costs posted their largest annual increase since 1982 in the first quarter of this year. 

“You have labor markets that are demographically constrained,” said Jonas Prising, chief executive officer of ManpowerGroup Inc., a staffing company. “Workers have a much better bargaining position.”

Net Zero

Even ardent supporters of a “greener” world — like Carney -– acknowledge that getting there will be costly.

In a March speech, Carney likened the necessary changes to those that followed the twin oil shocks of the 1970s — which rendered swathes of the economy uncompetitive, and fueled the inflationary surge that Volcker had to tame. One difference: The transition to net zero can be spread over a longer period, giving companies more time to adapt.

The BlackRock Investment Institute estimates consumer prices could rise by as much as 4% a decade from now if the transition costs are fully passed on to households.

“You’re going to have to retrofit your factories. You’re going to have to swap out your equipment. That’s going to cost you,” said Dana Peterson, chief economist for the Conference Board. “And who’s going to pay for that? The customer.”

European Central Bank Executive Board member Isabel Schnabel points to the risk that costs of energy, and key materials such as the lithium used in batteries, could remain elevated. “There’s a more persistent or more structural component to these energy-price shocks,” she said this month in Bloomberg’s Stephanomics podcast.

Housing Shortfall

While the US housing market will get hit in the short-run by a Fed-driven rise in mortgage rates, many economists still think it will put upward pressure on inflation over the next decade. That’s because elevated demand from aging millennials is running up against constrained supply.

The housing bust a dozen years ago drove some smaller home-builders out of business, leading to a shortfall of supply that Zandi estimates is on the order of 1.5 million to 2 million homes –- and which will take years to clear.

“Given the shortages in the housing market, it’s going to be very difficult to get rents down,” Zandi said. “That’s going to be a persistent problem for the Fed.” 

Productivity Bailout?

One thing that could help the Fed out of its inflation difficulties would be if the US economy can achieve faster productivity growth.

That would allow companies to meet higher costs for labor or materials without having to raise prices to maintain their profits. It’s what happened in the late 1990s as the internet took off, after a series of Fed rate increases kept inflation at bay.

There are some grounds for optimism. Business spending on equipment surged at an annualized pace above 15% last quarter, the fastest in over a year. Manpower’s Prising said he expects companies to forge ahead with a digital transformation turbocharged by the pandemic, which is enabling them to “do more with less” — pretty much the definition of higher productivity.

That would be a welcome change –- but likely not enough to offset all the others in store.

“Large structural forces pushed inflation down for the last 40 years,” former Fed Governor Kevin Warsh said. “Those structural forces are now reversing.”

— With assistance by Simon Kennedy, and Brendan Murray

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.

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High import tariffs lead to baby formula shortage in US: Report | World News



With only four major manufacturers of formula in the United States today-Mead Johnson, Abbott, Nestle, and Perrigo, some 40 percent of the nation`s baby formula has been out of stock recently, causing new mothers to hunt from store to store to feed their infants. “One reason the market is so concentrated is tariffs up to 17.5 percent on imports, which protect domestic producers from foreign competition,” said The Wall Street Journal last week, citing the Donald Trump administration`s efforts to protect domestic formula producers by imposing quotas and tariffs on Canadian imports in the United States-Mexico-Canada Agreement trade deal.

“America`s baby-formula shortage illustrates how bigger government can make big business bigger, thereby limiting competition and choice,” said the newspaper, noting that this is especially worth noting as Democrats push to expand entitlements and government control over the private economy.

It also illustrates that global trade has its uses, and there are costs to the faddish drive to produce everything in the United States, according to the report. “Members of both parties in Congress want to subsidize domestic production, but this can create its own supply-chain vulnerabilities,” said the report, adding that “globalization nowadays may be a dirty word, but having diverse suppliers is an economic strength.”


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India will provide 25% of global workforce and contribute 15% of world GDP by 2047: Scindia



Union Minister Jyotiraditya Scindia has said that India has to focus on “building capability, capability and capability” as the country is on the road to providing “25 per cent of the total global workforce and contributing 15 per cent of global gross domestic product by 2047”.

“India has shown that the Indian way of globalisation will show the path for globalisation that will be balanced, decentralised, symmetrical and pivoted on territorial integrity,” Scindia said at the India Ideas Conclave here on Saturday.

Speaking on India @2047 at the conclave organised by India Foundation, the minister said if democracy was prospering in different parts of the world, “some level of the credit should come to India”.

According to Scindia, there are eight pillars for the India model, which “had shed the socialist straitjacket and myopic ideas and replaced them with Atmanirbhar Bharat”.

The BJP-led government has been transforming the country by empowering the people through direct benefit transfer, the minister said. Scindia said that in the past eight years, $200 billion was distributed among 950 million people—$86 per person, adding that central schemes would benefit every citizen and the per capita income would rise above Rs 4 lakh by 2047. This was Rs 53, 000 in 2010-11.

According to the minister, the second pillar is infrastructure development focusing on the streamlining of logistics for urban areas and on last-mile connectivity for rural areas. Technology will be the third pillar. “Technology today is all pervasive—India has moved a long way in it. The amount of digital transactions happening in India is equal to the GDP of 21 countries,” he said. India’s power is that it has a billion people with their biometrics digitised and there are a billion bank accounts, he said.

According to Scindia, the fourth pillar will be the “paradigm shift” in the GDP position. With production-linked incentive schemes in place in sectors like telecom, semiconductor and drones, 35 per cent of India’s GDP will be from manufacturing, 10 per cent from the agrarian sector and 55 from the service sector, he said, adding that the transformation of the tier-two cities into tier-one cities would further strengthen the economy. The minister listed the rise of the urban economy as the fifth pillar.

Scindia said demographic power would be the sixth pillar and India would provide 25 per cent of the global workforce. While diplomacy and diaspora, which Union minister said Prime Minister Narendra Modi had reinvented to India’s advantage, will be the seventh pillar and India’s global standing will be the eighth one. “The geopolitical climate is incrementally favourable to India, thanks to our foreign policy,” he said.

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NatWest’s Sir Howard Davies: ‘I’m quite pessimistic. Brexit was a significant mistake’ | Banking



Sir Howard Davies is a worried man. He is worried about political polarisation. He is worried about the long-term impact of Brexit on the City of London. And he is worried by the pushback against globalisation.

One thing he is not especially worried about is the health of the bank he chairs, NatWest, which in its former guise as Royal Bank of Scotland was on the edge of collapse during the global financial crisis of 2008.

Davies has been chair of NatWest for seven years and the turning point in the bank’s fortunes, he says, was paying a $4.9bn (£3.6bn) fine to the US authorities in 2018 for its role in the sub-prime mortgage crisis. Until that point, NatWest had been “scrambling behind the sofa” to find capital, but now it is in better financial shape than many comparable European banks and has been able to expand. It has, he says, been “a game of two halves”.

The footballing metaphor is telling because Davies has another concern. As a lifelong Manchester City fan, he fears his side will be pipped to the Premier League title by Liverpool in Sunday’s last round of matches. To mitigate the


Age 71

Family Married to a lapsed journalist. Two sons, one left, one right.

Education Bowker Vale primary; Manchester grammar school; Memorial University of Newfoundland; Merton College, Oxford; Stanford business school.

Pay “The usual answers are ‘enough’ or ‘no comment’, but £750,000 is published in NatWest’s accounts.”

Last holiday Cycling along a section of the Rhine path. “One day I will complete it.”

Best advice he’s been given “Always show you could do your boss’s job if required.”

Biggest career mistake “Agreeing to be director of the LSE. It ended in tears.”

Word he overuses “Guardiola, as in ‘we’ve got Guardiola’, sung to the tune of Glad All Over.”

How he relaxes Playing cricket, and listening to pianist Brad Mehldau: “Not usually at the same time.”

potential agony, he has staked £100 at 8-1 on Liverpool adding the title and the Champions League to the FA and Carabao cups they have already won.

It’s an “emotional hedge”, he admits, as he discusses a career spanning half a century in which he has worked at the Foreign Office, the Treasury and the Bank of England, and been Britain’s top financial regulator, director general of the CBI, a management consultant, and the head of the inquiry into UK airport capacity.

Asked which of his many jobs he has enjoyed the most, he picks none of the above but plumps for running the Audit Commission (subsequently scrapped by David Cameron’s government), which looked into whether local authorities were providing value for money.

“It was a riveting job. I found you could make significant improvements to local services, where the variations were absolutely enormous. It was really interesting and rewarding, and you could actually see you were making a difference.”

Far less enjoyable was the end of Davies’s stint as director of the London School of Economics after concerns were raised about the school’s decision to accept funding from a foundation controlled by the son of Muammar Gaddafi.

Davies says he never asked for money himself and thought there was something not quite right about the arrangement, but accepts that he should have spotted the potential for trouble. “There is no doubt I made a mistake. I should have stopped it and I didn’t.”

His latest project is a book – The Chancellors, published by Polity Press – about the Treasury’s role in the running of the economy under every chancellor from Gordon Brown to Rishi Sunak.

Davies was made head of the Financial Services Authority by Brown when supervision was hived off from the newly independent Bank of England in 1997, and he later faced criticism for failing to clamp down heavily enough on the City during the buildup to the crash of 2008. “At the time, people moaned about financial regulation being too tight and that I was judge and jury in my own court,” he says. “I was accused of being an overmighty regulator who was getting in the way of ‘animal spirits’. There was never any criticism in the other direction.”

Asked which of the recent chancellors he has most time for, Davies picks Alistair Darling, whose three years at the Treasury between 2007 and 2010 were dominated by the banking crash.

“Alistair had terrible hand to play. He had no money, a financial crisis and his predecessor as his boss. There wasn’t anything Alistair knew that Gordon didn’t. Yet he was completely unflappable.”

When he started writing the book, Davies was convinced he would conclude that the Treasury should be broken up into separate finance and economic departments, the model preferred by most other European countries. He has since changed his mind. “A bit of check and balance in our system is a very good idea,” he says. “If we divided responsibilities and had a department of economic affairs and a ministry for the budget, they would separately be less powerful than the Treasury is together and that would give No 10 free rein. That would be a mistake.

“This prime minister hated the Treasury partly because of its pro-EU views, or perceived pro-EU views, and role in the referendum. But when he got himself in a hole, who else but the Treasury could bail him out?”

If Davies is upbeat about the prospects for NatWest, he is less positive about what the future has in store for the UK. “I am quite pessimistic actually. Brexit was a significant mistake. You don’t solve the problems of the left-behind by damaging the one area of the country that’s been writing the cheques. London is paying large amounts of tax and will be damaged by Brexit over time.

“I worry about political polarisation. The same thing is happening in France [Davies teaches in Paris] and in the US. It is possibly less bad here than in the US or France, but I sense a kind of bitterness in public life which doesn’t create a good environment for rational solutions to problems.”

Davies says that when he first came to London from Manchester in the 1970s the capital was “gloomy” and “monochrome”, yet subsequently became a vibrant, multi-racial city. He fears the pendulum could now be swinging in the other direction. “China is separating from the US and there is this war [in Ukraine]. London has been the beneficiary of globalisation and if it goes into reverse, maybe the global city is past its peak.”

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