Policymakers struggle to contain surging inflation

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Good evening

Today’s higher than expected consumer price growth from the US caps a busy week of data and policy announcements in the battle against surging inflation.

US consumer prices rose by a more than expected 1 per cent during May, piling further pressure on the Federal Reserve to tighten monetary policy. The year-on-year increase of 8.6 per cent is the highest since December 1981. The Biden administration has blamed the war in Ukraine and supply chain problems caused by China’s coronavirus lockdowns.

China itself however remains at odds with global trends. Data earlier today from the world’s second-largest economy showed factory gate prices rising at the slowest rate in more than a year as lockdowns pushed down demand for commodities, while consumer prices rose just 2.1 per cent from the year before.

The European Central Bank meanwhile has called time on the easy money era as it strives to contain inflation which hit 8.1 per cent in the year to May — more than four times its target of 2 per cent. The ECB signalled yesterday that it was likely to raise rates by half a percentage point in September in addition to a quarter-point rise in July. Its remaining €20bn-per-month bond purchases programme will also come to an end.

The ECB’s hawkish turn has revived investor concerns about the ability of weaker eurozone states to support their massive debt loads, triggering a sell-off in bond markets today. Some economists believe the bank’s governing council lacks the expertise to get the balance right between fighting inflation and avoiding economic and financial meltdown.

The outlook across the Channel however looks even more grim. FT analysis shows the UK set for the highest inflation in the G7 from now until 2024 as it suffers from the worst aspects of mainland Europe (surging energy prices) as well as those in North America (rises in other goods and services). The price of filling a typical family car with petrol yesterday topped £100.

Investors are betting the pound will fall further as the prospect of weakening growth on top of rising inflation darkens the economic outlook. Britons meanwhile are cutting spending, with some turning to loan sharks as the cost of living crisis intensifies. Unions are threatening strikes as pay rises fail to keep up.

The Bank of England is also facing increasing criticism for how it is tackling the problem: an official survey today showed Britons expect prices to continue to rise sharply over the next five years.

Compare rising prices around the world with our global inflation tracker.

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Need to know: the economy

Half of Shanghai’s 16 districts went back into lockdown after a handful of new Covid cases were detected, barely a week after authorities had declared victory over the virus. China is set to extend its zero-Covid strategy for the long-term, despite the economic and human toll.

The latest twist in the global energy crisis involved a fire at an LNG plant in Texas, causing another surge in gas prices in Europe, which is increasingly looking to the US for supplies. In the UK, Centrica has applied to reopen the country’s biggest gas storage site, while the government has given the go-ahead for gas drilling in countryside south of London. Energy editor David Sheppard says the world must brace itself for a further surge in oil prices.

The crisis continues to peck away at the move to sustainable sources. Members of the European parliament knocked back parts of an EU climate bill, highlighting the political difficulty of tackling climate change at a time of soaring energy bills. Meanwhile, interest in Canada’s oil sands, home to some of the world’s dirtiest fuel, is rocketing.

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Latest for the UK and Europe

UK chancellor Rishi Sunak was accused of wasting £11bn of taxpayers’ money by paying too much interest on government debt because of a failure to take out insurance against interest rate rises. The loss is greater than the amount Conservatives accused former Labour chancellor and prime minister Gordon Brown of losing on sales of gold reserves in the 2000s.

Sunak’s boss Boris Johnson has been trying to make economic growth his top priority after months of negative headlines about lockdown shenanigans, but FT analysis shows business investment remains weak, despite government incentives.

One of Ukrainian president Volodymyr Zelenskyy’s top advisers told the FT that Russia’s wealth must be targeted to offset the estimated $600bn in damages caused by its invasion. Kyiv is stepping up takeovers of Russian assets in the country such as banks and factories and wants its allies to start making seizures worldwide. The UN meanwhile warned of the risk of global hunger as talks stalled over the blockade of grain at the port of Odesa.

In contrast with much of the rest of the world, Russia today cut its key interest rate for the fourth time since March to 9.5 per cent, citing slowing inflation and growth. Inflation has been declining in Russia because of the strength of the rouble, the best performing currency this year.

Global latest

Hotspots in London and parts of the US may still be attracting attention, but interest rate rises look likely to cool the rapid growth in global house prices that has taken place over the past two years, writes economics reporter Valentina Romei.

Line chart of Annual % change showing The boom in house price growth is forecast to end

Japan, one of the last countries in Asia to resume overseas tourism, reopens today but with last-minute guidelines restricting entry to escorted visitors only. The move has caused dismay among business owners in the country’s $36bn tourism market.

The cost of living crisis may be intensifying but the world’s richest are sitting pretty. A new study shows that wealth growth has proven extremely resilient to economic shocks, with financial wealth alone likely to increase at about 5 per cent a year for the five years to 2026.

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Need to know: business

The Bank of England said HSBC, Lloyds Banking Group and Standard Chartered had “shortcomings” in their plans to ensure they could fail without harming customers and taxpayers. Banks had been told to create “resolution plans” to make sure the bailouts of the 2007-08 financial crisis would not be repeated, even if lenders were to collapse.

An investigation by the UK competition regulator into Apple and Google’s dominance in smartphone browsers and cloud gaming is the latest crackdown against the power of Big Tech.

Trafigura, one of the world’s largest commodity traders, reported record half-year profits up 27 per cent to $2.7bn as it took advantage of volatile markets.

The FT Editorial Board criticised airlines for promises they were unable to keep and said they should cut back flights now to prevent a summer of chaos. Pilot unions hit back at Wizz’s call for staff to go “the extra mile” when they were tired. Meanwhile, flights to European holiday destinations have passed 2019 levels for the first time.

Our Big Read examines prospects for buy now, pay later companies as doubts grew that cash-strapped customers would be able to keep up payments. The industry was turbocharged by the ecommerce boom during the pandemic, with Swedish group Klarna becoming the most valuable fintech start-up in Europe.

The boom in Spacs — shell companies that raise money from investors and list on the stock market — appears to be fizzling out, thanks to rising interest rates, a weakening market and the prospect of tighter rules from US regulators.

The amount that Spacs have raised has tumbled as have the number of deals they have completed

Science round up

Moderna said its new Covid-19 booster increased immunity against Omicron after the first clinical trial of a jab targeting the variant. The “bivalent” booster contains the genetic code of Omicron as well as the original strain of the virus.

US regulators backed the Novavax Covid vaccine, a protein-based jab which is an alternative to the mRNA technology used by BioNTech/Pfizer and Moderna and has been used against diseases such as shingles and the flu for decades.

Pandemic upheavals meant 23mn children across the world missed out on the usual protective vaccinations in 2020. Health authorities in Europe have warned of a heightened risk of measles over the coming months, as well as potential outbreaks of mumps and rubella.

Beijing has adopted a novel approach to win over vaccine sceptics: it is offering insurance against jab-related side effects.

Covid cases and vaccinations

Total global cases: 529.0mn

Total doses given: 11.9bn

Get the latest worldwide picture with our vaccine tracker

And finally. . .

The FT’s Peggy Hollinger and Clive Cookson yesterday carried out the ultimate remote interview: talking to an astronaut live in space. The European Space Agency’s Samantha Cristoforetti discusses life on the International Space Station, the fallout from the Russian war and the dangers of space junk.

Video: FT interviews astronaut Samantha Cristoforetti in space

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