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Have US retail sales been hit by stubbornly high inflation?

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Did US retail sales continue to grow in April?

US retail sales are expected to have grown last month, in a sign that consumers have not yet been discouraged by stubbornly high levels of inflation.

Economists polled by Reuters forecast that US retail sales rose 0.7 per cent month-on-month in April. Sales excluding motor vehicles and car parts are expected to have climbed 0.3 per cent, after rising 1.1 per cent in March.

Higher prices and consumers’ willingness to spend were probably the main reason for the jump in sales last month, said Oren Klachkin, lead US economist at Oxford Economics.

Although inflation moderated in April, the consumer price index still remained at a four-decade high as it jumped to an annual pace of 8.3 per cent in April from 8.5 per cent in March. Retail sales are not adjusted for inflation, which may have boosted some of the gains, Klachkin added.

“While retail sales are up 27 per cent since the pandemic started, our estimates show that inflation-adjusted retail sales are up only 7 per cent over the same time,” said Klachkin.

The categories to watch will be autos and petrol, according to James Knightley, chief international economist at ING. “Given new car prices were higher in the CPI report this component should post a decent rise in nominal sales,” said Knightley. “Gasoline will face a headwind since demand is pretty inelastic and according to the CPI report prices were down 6.1 per cent month-on-month.” Alexandra White

Has the new energy price cap lifted UK inflation even higher?

UK inflation is expected to continue its steep upward trend in the coming months, staying well above the Bank of England’s target of 2 per cent.

Annual consumer price growth hit a fresh 30-year high of 7 per cent in March, boosted by higher energy prices. However, ‘core’ inflation, which excludes energy, food and tobacco, also topped analysts’ estimates at 5.7 per cent.

With the Ofgem energy price cap rising by 54 per cent in April, the reading for last month is expected to have jumped to the highest since comparable records began in 1989. Economists polled by Reuters forecast an overall CPI figure of 9.1 per cent, with core inflation up to 6.2 per cent.

Line chart of Forecast for 2022, by date of forecast, annual % change showing Economists are revising down their UK growth forecast for this year as inflation rises

“A further substantial jump in inflation is virtually a given for April’s figures,” said Sandra Horsfield, economist at Investec.

The increase in the energy cap will push up inflation by 1.6 percentage points, Horsfield calculated, but price pressures are intensifying from various sides — with VAT on the hospitality sector reverting from its temporarily reduced rate of 12.5 per cent to the full 20 per cent rate at the start of the month, a rise in telecoms and water bills and higher transport fuel.

She expects annual inflation to climb to 9.1 per cent and core inflation to jump to 6.3 per cent when the data are released on Wednesday.

Earlier in May, the BoE forecast that consumer inflation will peak in the autumn at about 10 per cent, possibly plunging the economy into a recession. Economists polled by Consensus Economics have consistently revised down their economic growth forecasts for this year after Russia’s invasion of Ukraine stoked price pressures even further.

High inflation will be a “major concern to individuals and policymakers for some time,” said Horsfield. Valentina Romei

How will recent crypto jitters impact retail investor sentiment?

Retail investor sentiment towards speculative assets has soured this year as surging inflation, interest rate rises and geopolitical uncertainty collectively stoke fears over global growth.

In a trading environment characterised by volatility, the air has hissed resoundingly out of high-growth stocks that were among the biggest winners of the early days of the pandemic — from interactive fitness company Peloton to streaming giant Netflix.

But it is the $1.3tn cryptocurrency industry that has abruptly shaken financial markets in recent days. The price of bitcoin, perceived as a gauge of investor sentiment towards speculative assets, fell to just $25,390 on Thursday — more than 60 per cent below its peak of almost $70,000 in November.

That drop came after crypto was hit by one of its biggest challenges to date, when stablecoin Tether — a critical tool in the digital token universe — briefly failed to maintain its pledged one-to-one link with the US dollar.

The question now is whether the jitters sparked by Tether snapping its dollar peg will compound retail investors’ broader concerns about so-called risk assets. Tether’s tumble, which stemmed from a bout of intense selling pressure, came just days after the failure of smaller competitor TerraUSD.

“The cryptocurrency market is feeling the shockwaves from stablecoins and is being tested to its very core,” said Saxo Bank’s head of equity strategy Peter Garnry, with “signs of panic and massive selling pressures.” Garnry added that there is a “huge overlap of people that invest in both Tesla, Ark Invest funds, and cryptocurrencies and that makes this risk cluster dangerous because it becomes a forceful negative feedback loop on the downside.”

Analysts say contagion from recent crypto ructions could hit riskier assets in regions beyond the US and Europe. According to JPMorgan, “newer Japanese retail investors dating from Covid-19 hold not just equities but also speculative assets” and “the recent sell-off in cryptocurrencies is depressing the risk appetite of these mostly short-term investors.”

The US bank added: “We think the deteriorating performance of retail investors’ cryptocurrency holdings could indirectly dampen their enthusiasm for Japanese stocks.” Harriet Clarfelt



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Economy

Jeff Bezos turns up heat on Joe Biden over US inflation

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Jeff Bezos lashed out at Joe Biden’s White House on Monday over policies he claimed risked stoking inflation, escalating a war of words over the cause of sharply rising prices that are dominating US politics in an election year.

The Amazon founder and world’s third-richest person took aim at the Biden administration’s failed Build Back Better bill, which would have increased taxes on the wealthy and large companies to pay for spending on childcare, education and programmes to curb climate change.

“Administration tried their best to add another $3.5tn to federal spending,” Bezos wrote on Twitter. “They failed, but if they had succeeded, inflation would be even higher than it is today, and inflation today is at a 40-year high.”

Bezos’s attack was an uncharacteristic outburst for one of the world’s best-known businesspeople, who has not previously used Twitter to wade into contentious political disputes.

It followed a back-and-forth with the White House that began on Friday, when Bezos criticised a tweet from Biden that suggested one reason inflation had taken off was that wealthy companies did not pay enough in tax. Bezos retorted that while high inflation and the level of taxes paid by companies were issues that deserved to be discussed, linking the two was a “non sequitur” that should be put before “the newly created Disinformation Board”.

The White House reacted scathingly to the Bezos tweets. “It doesn’t require a huge leap to figure out why one of the wealthiest individuals on Earth opposes an economic agenda for the middle class that cuts some of the biggest costs families face, fights inflation for the long haul and adds to the historic deficit reduction the President is achieving by asking the richest taxpayers and corporations to pay their fair share,” a spokesperson said.

Bezos also came under fire on Monday from Lawrence Summers, the former US Treasury secretary, who broke with most economists early last year to start warning about the rising risk of inflation. Summers called the tech entrepreneur “mostly wrong”, adding that it was “perfectly reasonable to believe . . . that we should raise taxes to reduce demand to contain inflation and that the increases should be as progressive as possible”.

Tensions between Bezos and the White House have been exacerbated by the president’s support for organised labour, including unionisation efforts at Amazon that have been building since Biden took office 18 months ago. “It’s also unsurprising that this tweet comes after the President met with labour organisers, including Amazon employees,” the White House spokesperson said.

Since stepping down as chief executive of Amazon last year, Bezos has become increasingly active on Twitter and used it to make occasional barbed asides related to his personal views, though not with the frequency or vehemence of rival tech billionaire Elon Musk.

Last month, Bezos suggested that Tesla’s heavy dependence on sales to China could give the Chinese government leverage to force Musk to bow to censorship after his planned purchase of Twitter.

As with Musk, Bezos has shown libertarian political instincts and once waged a bitter fight with Amazon’s home city of Seattle over a proposed tax increase. Amazon has also long resisted unionisation by its employees, putting it at odds with the Biden administration.

However, Bezos has also at times backed liberal causes, including donating heavily to defend same-sex marriage in Washington state and hiring Jay Carney, a former press secretary in the Obama White House, to head public policy and communications at Amazon.

The public spat between Bezos and the White House was symptomatic of broader frictions between business and the Biden administration and Democratic lawmakers over inflation, with some officials blaming corporate America for price-gouging and taking advantage of rising prices at the expense of ordinary consumers.

However, most economists said inflationary pressures were due to a combination of factors including high demand driven by government stimulus and the rebound from the coronavirus pandemic downturn, as well as the oil price shock exacerbated by the war in Ukraine and supply chain bottlenecks that have been more persistent than expected.





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China’s extreme Covid lockdowns drag down economic activity

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This article is an onsite version of our Disrupted Times newsletter. Sign up here to get the newsletter sent straight to your inbox three times a week

Good evening,

Could Covid be the undoing of the Chinese economic miracle? Figures released today show that lockdowns to enable President Xi Jinping’s zero-Covid strategy are enacting a significant toll on economic activity.

Industrial production, the motor that drove China out of the initial Covid shock in early 2020, dropped 2.9 per cent in April. This ran counter to expectations of a slight increase.

Meanwhile, retail sales, the country’s main gauge of consumer activity, slumped 11.1 per cent year on year, compared with forecasts of a 6.6 per cent fall from economists polled by Bloomberg.

Today’s data are a stark reminder of the economic damage being done by China’s zero tolerance approach to coronavirus, enacted through citywide lockdowns, mass testing and quarantine centres. Xi has reaffirmed his commitment to the policy as the tool to eradicate Covid ahead of his bid for a third term in power later this year, but it is expected to have deep ramifications, not just for China but for global supply chains.

The immediate future looks equally difficult for the world’s second-largest economy and its neighbours. The benchmark coal price for the Asian market was pushed to a record high today because of weak supplies from Australia.

High-energy coal shipped from the Australian port of Newcastle was assessed at almost $400 a tonne by Argus, a price reporting agency. That topped the previous high set in March after the invasion of Ukraine raised gas prices, pushing power stations to burn coal to generate electricity instead.

Latest news

For up-to-the-minute news updates, visit our live blog

Need to know: the economy

The economic gloom has spread to the EU. Today, Brussels cut its growth forecasts further and lifted its inflation outlook, blaming the energy crisis triggered by Russia’s invasion of Ukraine.

Both the EU and euro area are set to expand by 2.7 per cent this year, significantly lower than the previous forecast of 4 per cent. Inflation is now expected to surpass 6 per cent, with some central and eastern European countries likely to see double-digit price rises in 2022.

Latest for the UK and Europe

British manufacturers are bringing production back to the UK, reversing the “offshoring” trend of recent years because of concerns about how the pandemic and Brexit have disrupted supply chains. Three-quarters of companies have increased the number of their British suppliers in the past two years, according to a survey by Make UK, the manufacturers’ trade group.

A key part of the problem for Europe in its effort to wean itself off Russian oil and gas is the existence of infrastructure “pinch points” across the continent. Jonathan Stern, research fellow at the Oxford Institute for Energy Studies, said many projects being reconsidered have been planned for years but rejected as not commercially viable when assessed against cheap Russian gas supplies. That assessment has now changed.

Global latest

G7 foreign ministers have warned of a global hunger crisis unless Russia lifts its Ukraine blockade. Speaking at the conclusion of a three-day meeting in Germany on Saturday, German foreign minister Annalena Baerbock said some 25mn tonnes of grain were stuck in Ukrainian ports that were being blockaded by Russian forces — “grain that the world urgently needs”.

Inflation has returned to haunt Brazilians, triggered by the surge in global food and fuel costs. At 12 per cent, it is now at an almost two-decade high and officials are increasingly concerned that price pressures are becoming entrenched across the economy.

Need to know: business

America’s shale oil companies are enjoying a cash bonanza, following months of capital restraint by a sector that suddenly finds itself in demand thanks to the global energy crisis. Operators will generate about $180bn of free cash flow — operating income minus capital and maintenance outflows — this year at current crude prices, according to research company Rystad Energy.

Column chart of $bn  showing US shale free cash flows are soaring

McDonald’s has announced that the invasion of Ukraine means it can no longer run outlets in Russia. The Chicago-based company, which operated 850 restaurants in Russia and employed 62,000 people, is looking for a Russian buyer that would retain these staff. It said it expected to book a non-cash charge of $1.2bn to $1.4bn for the exit.

Renault has sold its Russian business Avtovaz, which made the Lada, to a state-backed car institute for two roubles. The French company’s exit highlights the meagre options facing businesses trying to leave Russia without huge losses on their investments.

Ryanair chief executive Michael O’Leary has warned that the outlook for flying remained fragile and vulnerable to new shocks, as the carrier reported a loss of €355mn for the 12 months to the end of March, down from €1.015bn the year before. O’Leary added the airline would “do very well” over the summer if travel was not disrupted by a new coronavirus variant or the war in Ukraine spreading.

City centre shopping malls may at last be evolving into multipurpose hubs for business and leisure as well as shopping, as envisaged by their 20th century creator, Vienna-born architect Victor Gruen. But reinvigorating older centres will require investment, a challenge in a cash-strapped sector that has suffered from brutal value destruction, according to an FT analysis of the property sector.

The World of Work

Anger about high bonus payments for executives, often paid on top of hefty salaries, is easy to understand. But now studies have found that the whole system of paying people to hit targets is flawed. This is in large part because a lot of bonus systems are outdated in an age of knowledge work, writes FT columnist Pilita Clark.

Male managers in the UK are blocking efforts to improve the gender balance at British companies, according to research by the Chartered Management Institute. Two-thirds of the male respondents in the survey of 1,149 managers said they believed their organisation could successfully manage future challenges without gender-balanced leadership. The survey follows widespread condemnation of sexist remarks directed at Aviva chief executive Amanda Blanc at the company’s AGM last week.

Packing up a workspace is a huge task, but one Oxford scientist did just that and moved his team to the Netherlands, in part to be closer to his family after 14 years of working in the UK and partly to avoid the adverse consequences of Brexit for British science.

Covid cases and vaccinations

Total global cases: 515.2mn

Total doses given: 11.7bn

Get the latest worldwide picture with our vaccine tracker

And finally . . . 

Illustration of ‘Rutherford Hall’
© Eliot Wyatt

The FT has a new columnist, critical communications strategist Rutherford Hall. He kicks off this week by offering some (rather suspect) advice to London-based Russian businessman (don’t on any account say oligarch) Oleg on why building a new swimming pool in the upstairs of his South Kensington mansion might not be the best way to improve his image. Hat tip to the FT’s UK editor-at-large Robert Shrimsley for “recovering” these emails.

Working it — Discover the big ideas shaping today’s workplaces with a weekly newsletter from work & careers editor Isabel Berwick. Sign up here

FT Asset Management — The inside story on the movers and shakers behind a multitrillion-dollar industry. Sign up here

Thanks for reading Disrupted Times. If this newsletter has been forwarded to you, please sign up here to receive future issues. And please share your feedback with us at disruptedtimes@ft.com. Thank you



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Economy

Ukraine will need massive economic support, too

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Vladimir Putin’s war on Ukraine has proved a catastrophic mistake. After Russian forces withdrew from around Kyiv last month, Ukrainian troops were on Monday filmed restoring border posts on the Russian frontier, having mostly pushed Moscow’s army back from the second city of Kharkiv. Finland and Sweden are meanwhile due this week to apply to join Nato — an expansion of the alliance that is the exact opposite of what the Kremlin’s war was meant to achieve. Yet Ukraine’s military successes should not obscure the need for the west to accelerate both weapons supplies, and financial support to counter Russia’s crippling economic war against its neighbour.

Large-scale help is starting to flow. The US Senate should this week approve a support package including military, humanitarian and economic aid that lawmakers have increased to $40bn from the $33bn President Joe Biden asked for last month. For now, though, this remains a budget line. The sooner it can be converted into further arms supplies, the greater Ukraine’s chance of containing and repelling Russian forces in eastern and southern Ukraine before they have time to regroup.

The prospect of a lengthy and vicious war of attrition in the east, while Russia continues to bombard military, infrastructure and economic targets elsewhere and to blockade Ukraine’s Black Sea ports, makes economic and non-military aid vital too — on a grand scale. Without a ceasefire, economic output is forecast to plunge more than 40 per cent this year. The Kyiv School of Economics puts direct damage to Ukraine’s infrastructure at more than $94bn by May 10, roughly one-third each accounted for by residential buildings and roads, with $10bn of damage to industry and factories and $15bn to railways, hospitals, bridges, schools and colleges.

One priority is budgetary support. War widened the deficit to $3.8bn in April, with $1.1bn of domestic debt redemptions — in line with the IMF’s assessment that Ukraine faces a financing gap of about $5bn a month for several months. Economic aid of $9bn in the coming US package takes western budgetary support commitments over $20bn, but these, too, will take time to arrive. The IMF is looking at transferring 10 per cent of unused special drawing rights to Ukraine, but the initiative must surmount EU legal hurdles.

Other problems require material and logistical support. Grain exports — crucial to Ukraine’s economy and to global food supplies — are impossible via the Black Sea thanks to Russia’s blockade of Odesa and other ports and seizure of Mariupol. That will require what Brussels calls a “gigantesque” effort to move grain via road and rail to Baltic and other European ports. But efforts are complicated by Ukraine’s different rail gauge and shortages of trucks. The EU has pledged to establish “solidarity lanes” to ensure Ukraine can export grain and import necessary goods, from humanitarian aid to fertilisers and animal feed.

Shortages of motor fuel — thanks to damage to a refinery at Kremenchuk in central Ukraine — threaten to hamper both the civilian and military economy. And border delays are hindering exports of those manufactured goods Ukraine is still managing to produce.

Including indirect costs such as forgone GDP, corporate profit and investments, labour outflows, and higher defence and social spending, Kyiv economists already estimate Ukraine’s total losses from the war at $560bn-$600bn. With Nato allies unwilling to go to war with a nuclear-armed Russia, Ukraine is having to fight alone. It will need all the international support it can muster to deal with the long-term economic devastation.



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