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Global policymakers grapple with stickier than expected inflation

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Contrasting updates from the world’s two biggest economies and a week of warnings from the IMF have kept global inflation firmly in the spotlight this week.

China’s consumer prices remain on the brink of deflation, according to a batch of new data this morning highlighting the fragile state of the world’s second-largest economy. The CPI was unchanged year on year while producer prices fell 2.5 per cent. Financial sector authorities are considering setting up a stock market stabilisation fund to boost flagging confidence among domestic investors. 

US data yesterday told a quite different story, with its CPI for September higher than forecast at an unchanged 3.7 per cent year on year, raising the prospect of a further interest rate rise by the Federal Reserve. The “core” measure, which strips out volatile energy and food prices, edged down from an annual 4.3 per cent to 4.1 per cent.

The data follows stronger than expected jobs numbers last week, fuelling concerns that inflation may be becoming stuck above the Fed’s 2 per cent target. According to the minutes of its last policy meeting published on Wednesday, officials agreed on the need to “proceed carefully” on interest rate decisions while the IMF on Tuesday urged the Fed to hold its nerve. Consumers are pessimistic: a survey today showed expectations for inflation in the coming year moving sharply higher.

Across the Atlantic, monetary policy decisions are set to remain “tight” after Bank of England chief Andrew Bailey cautioned today that the last mile of getting inflation back to target would be the “hardest”. The BoE’s chief economist said yesterday future rate decisions would be “more finely balanced” after GDP data suggested the UK economy was near-stagnant in the third quarter.

More signs of the impact of high borrowing costs on the economy came from yesterday’s quarterly Bank of England survey of banks and building societies and new data today showing a jump in corporate insolvencies.

The IMF this week singled out the UK for its “quite persistent” levels of inflation, predicting the BoE may need to increase rates further from their current level of 5.25 per cent. It said headline inflation would be higher than other G7 countries at 7.7 per cent this year before dropping back to 3.7 per cent in 2024. On the positive side, UK grocery inflation continues to fall. The IMF also said the UK would have the weakest growth in the G7 next year.

In the eurozone, the minutes from the last European Central Bank policy meeting published yesterday showed the decision to increase rates last month to a record high of 4 per cent was a close call, with a final decision concluding that “the risks of tightening too much and the risks of tightening too little had become more balanced”.

Policymakers also have to contend with possible jumps in energy costs: European gas prices yesterday hit their highest level since March as pipeline problems added to concerns over tensions in the Middle East.

On a global level, the IMF said that while central bank rate rises are having some success at taming price pressures, more than 90 per cent of economies with an inflation goal were expected to remain above target, with the global figure next year projected to hit 5.8 per cent, an increase of 0.6 percentage points from its previous forecast.

Premium subscribers can sign up here for Chris Giles on Central Banks, your essential guide to money, interest rates, inflation and what central banks are thinking. The weekly newsletter launches on Tuesday at 12.30GMT.

Need to know: UK and Europe economy

UK chancellor Jeremy Hunt warned of “difficult decisions” on the public finances in his forthcoming Autumn Statement, with no scope for immediate tax cuts. Political instability has made the UK an unattractive place to invest in new infrastructure projects, according to IFM Investors, which singled out U-turns on the HS2 rail line and net zero for deterring new investment.

Those net zero U-turns could also raise household bills, according to the parliament’s Climate Change Committee. Meanwhile, the country’s energy regulator is considering increasing those bills to help suppliers suffering from record customer debts. Ofgem is keen to avoid a repeat of the situation in late 2021 and 2022 when soaring wholesale gas prices triggered the collapse of 30 suppliers, ultimately adding £82 to each household bill to cover the cost of bailing out the failed operators.

The rouble climbed against the dollar after the Kremlin reintroduced capital controls for the first time since the aftermath of Russia’s invasion of Ukraine last year, forcing some 43 companies to sell some of their foreign currency revenues for roubles. Here’s a new explainer on how western allies are trying to tap profits from frozen Russian assets.

Need to know: Global economy

Employment in developed economies rose to a record high in the second quarter, the OECD said. The share of the working-age population in employment in the group’s 38 member countries has now risen above 70 per cent.

New Zealand elects a new government on Saturday, with the ruling Labour party facing the prospect of defeat following the resignation of former leader Dame Jacinda Ardern. Polls point to a victory for a centre-right coalition headed by National party leader Christopher Luxon.

Cross-border trade and foreign direct investment stats do not tell the full story of how conflict between geopolitical blocs affects supply chains, writes US editor-at-large Gillian Tett. More worrying for investors than outright trade bans is the more subtle lengthening of supply chains that will raise inflation and possibly curb growth too, she argues.

Need to know: business

As DT reported on Wednesday, the EU is taking on social media platform X over disinformation about the Israel-Hamas war. It has now opened an official investigation, the first to be launched under the newly approved Digital Services Act.

Israel’s tech start-ups are due to lose up to 15 per cent of their workforce as the country calls up reservists to fight in Gaza, leaving the self-styled “Start-up Nation” facing an unprecedented test.

WD Lab Grown Diamonds, the second-largest US producer of man-made diamonds, filed for bankruptcy, becoming the sector’s first big casualty of a growing glut of fabricated gemstones.

A disappointing update from LVMH highlights the falling back to earth of the luxury sector, which had grown at a record pace during the pandemic, boosted by a growing affluent class in China.

A new FT investigation suggests Indian conglomerate Adani has been inflating fuel costs, leading to millions of Indian consumers and businesses overpaying for electricity

Science round-up

Nasa is set to launch a pioneering mission to Psyche, a metal-rich asteroid, with the hope of gaining more insights into Earth’s origins. The eight-year venture will be the first chance for a spacecraft to observe a predominantly metallic celestial object, rather than one formed of rock, ice or gases.

Global water cycles are “spinning out of balance” as climate change drives new patterns of extreme flooding as well as drought, the World Meteorological Organization said, highlighting the need for better monitoring and sharing of cross-border data.

Researchers have altered parts of chickens’ DNA to reduce the spread of bird flu without damaging their health, an intervention that could prove a simple and cost-effective way of protecting animals and humans from the disease.

A UK biotech company exploring new ways of treating Alzheimer’s and other neurodegenerative diseases has raised £48mn ($61mn) in its first big funding round.

Doubts over the usefulness of Merck’s Covid drug molnupiravir have raised further questions about the costly procurement of antivirals during the pandemic.

Read our profile of Katalin Karikó, joint winner of the Nobel Prize in medicine for discoveries leading to the messenger RNA vaccines that stemmed the tide of coronavirus infections during the pandemic.

Some good news

A world-first trial of a gene therapy to cure a form of deafness has begun with children from the UK, Spain and the US, potentially heralding a revolution in the treatment of hearing loss.

Something for the weekend

Try your hand at the range of FT Weekend and daily cryptic crosswords.

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Subscribers can now solve the FT’s Daily Cryptic, Polymath and FT Weekend crosswords on the iOS and Android apps

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