Reassessing the inflation threat | Financial Times

Today’s top stories

• Germany has asked Switzerland to sell some of its decommissioned Leopard 2 tanks as it struggles to cobble together two battalions of the fighting vehicles to send to Ukraine.

• UK prime minister Rishi Sunak is refusing to rush Britain back into the EU’s €95.5bn Horizon science programme, despite the prospect being hailed by the country’s scientists. Academics separately warned of the closure of more than 150 projects as EU funding that has supported them tapers out.

• CRH, the world’s largest building materials company, is planning to move its listing from London to New York in a new blow to the UK’s capital market alongside SoftBank’s rejection of a London listing for Cambridge-based chip designer Arm. Boards of other companies are discussing similar moves. The trend was shrugged off by London Stock Exchange chief David Schwimmer.

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Good evening.

The stream of hot inflation numbers over the past month has pushed US borrowing costs to 2007 levels, intensifying the debate about how high interest rates have to go to rein in soaring consumer prices.

“I don’t recall this dramatic of a reassessment of economic conditions in such a short time period, with the exception of major shocks like Covid-19 and the collapse of Lehman Brothers,” said Rick Rieder, an investment officer at BlackRock, the world’s largest money manager.

US labour costs for the last quarter were yesterday revised up, adding to central bank concerns, as our Big Read explains, that high pay settlements will keep inflation at elevated levels.

The news on labour costs follows a jump in the core personal consumption expenditures price index, the Federal Reserve’s preferred gauge of inflation, and a less-than-expected cooling in the consumer price index.

The stronger-than-forecast run of data continued today with new information on the US services sector, reinforcing fears that the Fed would keep interest rates higher for longer to combat the inflationary threat.

There are also renewed inflation fears across the Atlantic.

New data yesterday showed eurozone consumer price growth dipping only slightly from 8.6 per cent to 8.5 per cent in January. Analysts now think the European Central Bank will keep raising rates beyond an expected 0.5 percentage point increase on March 16. In Germany, the bloc’s biggest economy, inflation actually increased from 9.2 per cent to 9.3 per cent, with similar rises in France and Spain.

The UK outlook is different, according to Bank of England governor Andrew Bailey. He signalled to financial markets on Wednesday that it was wrong to assume the BoE would raise rates any further. Unlike in the US and the eurozone, British inflation had not outstripped forecasts and the economy was “evolving much as we expected it to,” Bailey said. The BoE still expects inflation to fall rapidly, particularly in April when energy bills are likely to rise by much less than at the same time a year ago.

Other aspects of the UK cost of living crisis are as serious as ever: new survey data on Tuesday showed record rises in food prices in February of 17.1 per cent would add £811 to the average British household’s annual bill.

Part of the uncertainty in markets around inflation is down to central banks struggling to communicate their intentions, writes Andy Haldane, former BoE chief economist and new FT contributing editor.

Unless they show a bit more imagination on targets, he writes, the “mini-monetary mistakes of the recent past” are likely to morph into the “maxi-monetary mistakes of the future”.

Browse our global inflation tracker to see how your country compares.

Need to know: UK and Europe economy

Columnist Helen Thomas says this week’s Brexit deal is still a bit of a “nothingburger” for the City, while Welsh first minister Mark Drakeford told the FT it created “perverse incentives” to move freight destined only for Northern Ireland to direct routes, diverting business away from the Welsh ports of Holyhead and Fishguard. Hopes however are rising that the deal could enable UK participation in the CPTPP transpacific trade bloc.

UK government plans to revoke all EU-derived legislation will cause more uncertainty and do nothing to increase economic growth, according to two-thirds of businesses in a new poll.

The Centre for Cities think-tank blamed the UK’s weak productivity on a slowdown in London, saying the capital since 2007 had trailed behind Paris, Brussels and New York and could benefit from more devolution. Economics editor Chris Giles suggests less restrictive planning regulations, and more liberal immigration policies for high-skilled employees could also help.

Need to know: Global economy

Chinese president Xi Jinping is poised to launch a “forceful” overhaul of his government at the annual National People’s Congress, which begins on Sunday. His most trusted acolytes are set to oversee key sectors including finance and tech, strengthening the Communist party’s grip on the economy.

Brazil’s economy shrank 0.2 per cent in the final quarter of 2022, highlighting the challenges ahead for president Luiz Inácio Lula da Silva. The weak performance, driven by shrinking industrial output and a cooling of services activity, ended five consecutive quarters of growth.

Western allies are pushing the United Arab Emirates to halt exports of critical goods to Russia and clamp down on suspected sanctions busting.

Need to know: business

Arm was also in the news over China’s blocking of the plan to offload its troubled joint venture in the country. Chinese officials are determined to keep the company directly involved in the unit at a time when the US is trying to cut the country off from cutting-edge chip technologies.

Korean chipmakers have expressed alarm over the tough conditions for US subsidies such as sharing excess profits. Companies editor Anne-Sylvaine Chassany says Joe Biden can teach the EU a lesson or two on big-state “dirigisme”.

Washington has put 28 Chinese groups on a trade blacklist for allegedly breaching US sanctions by sending technology for nuclear and missile programmes to third countries or procuring banned products for China’s military.

The global economy may be weak but the appetite for flying remains strong. Low cost airlines are reporting record booking sprees, US carriers cannot find enough planes and Air India has placed one of the biggest orders in aviation history. Lufthansa today said revenues had doubled, while Qantas said it would add 8,500 new jobs.

If you haven’t been following the scandal at South Africa’s Eskom, our Big Read has it all, including a tale of cyanide-laced coffee.

Science round up

The lab leak theory is back. A new assessment from the US energy department and comments from the FBI that Covid-19 sprung from a Chinese laboratory have rekindled a fierce political debate in Washington.

Mistakes thrown up by Generative AI programmes are sowing seeds of doubt in serious science, says commentator Anjana Ahuja. Investors are less worried: Inflection AI, a one-year-old start-up, is on course to have raised up to $1bn in just a year. US editor at large Gillian Tett is sceptical about AI possibilities in the property industry.

Scientists are aiming to develop a “biological computer” powered by millions of human brain cells. “Organoid intelligence” could outperform silicon-based machines while consuming far less energy if the scientists are successful, with the first applications in neuroscience and medicine.

A US biotech is trialling the active ingredient in magic mushrooms as a potential therapy for anorexia. Global pharma correspondent Hannah Kuchler explores the potential for psychedelics and how a break with reality can transform people’s relationship with the real world.

Wildfires in subarctic boreal forests are emitting rapidly increasing amounts of carbon dioxide, according to a study using new satellite technology. On a more positive note, the International Energy Agency said the fall in gas supplies from Russia had tempered the rise in emissions in Europe.

“I do not see us having a problem getting to Mars.” British astronaut Tim Peake gives a wide-ranging interview on the future of space exploration to the FT’s Henry Mance.

Some good news

People across the UK have been treated to a stunning display of the aurora borealis or northern lights twice this week. Favourable meteorological conditions over the next two years mean the prospects for Brits witnessing the phenomenon again are growing.

Something for the weekend

The FT Weekend interactive crossword will be published here on Saturday, but in the meantime why not try today’s cryptic crossword?