|
|
EUROZONE INFLATION RISES TO 8.6 PERCENT IN JUNE
Another month, another 40-year record for inflation in the 19-country Eurozone.
Prices rose 8.6 across the region in June, year over year, accelerating from 8.1 percent in May and rocketing up faster than at any time since 1997 when records began to be kept.
Prices in Spain rose by 10 percent year on year, the fastest since 1985, the Financial Times reported.
However, inflation in Germany dropped from 8.7 percent in May to 8.2 percent in June, due largely to temporary tax cuts on electricity and fuels as well as the popularity of the government’s €9 voucher for public transit fares, the FT said.
Analysts had expected inflation’s pace in the Eurozone to be 8.4 percent last month.
The U.S. logged inflation at 8.6 percent in May, a month earlier.
Food prices in the Eurozone shot up 8.9 percent year over year; energy prices soared 41.9 percent.
The European Central Bank (ECB) will adhere to its plan to raise its key interest rate by a quarter point this month, lifting it from -0.50 percent to -0.25 percent, with a sharper increase due in September, bank president Christine Lagarde said last week at a meeting in Portugal of central bankers.
The ECB has not altered its interest rate in eight years.
Higher borrowing costs would tilt the region’s economy more sharply toward recession, especially with energy prices not relenting and wages growing at a fraction of inflation’s pace, as we reported in “War Scrambles Europe’s Hopes for Economic Recovery” (15 Mar 2022) and “Wages Down in Europe and It’s Getting Worse” (28 Jun 2022)
TREND FORECAST: The ECB continues to err on the side of protecting the economy by making small, incremental rate increases that will have virtually no impact on inflation’s rate and maintaining a too-loose monetary policy.
The European Central Bank is raising rates far too late to have any material impact on inflation in the near term, if not longer.
Reversing inflation will result from consumers choosing to sharply curtail spending or, more likely, from a sharp recession that will throw millions out of work.
CENTRAL BANKERS WARN OF NEW ECONOMIC LANDSCAPE
After meeting last week in Portugal, three of the world’s most influential central bankers said the forces that kept inflation in check for the past several decades may now have been erased, forcing central banks to take a more active role in keeping price escalation in check.
Since the COVID War began, “we’ve been living in a world where the economy is being driven by very different forces,” Jerome Powell, chair of the U.S. Federal Reserve, said in a panel discussion with Christine Lagarde, president of the European Central Bank (ECB), and Bank of England governor Andrew Bailey.
Factors including globalization, which kept moving factory production to countries with the cheapest labor, helped keep costs low and retail prices stable.
However, globalization is now in retreat as a result of the Ukraine war and Western sanctions.
“We’re living with different forces now and have to think about monetary policy in a different way,” Powell said.
“We understand better now how little we understand about inflation,” he added.
Lagarde was less guarded in her assessment.
“There are forces that have been unleashed as a result of [the COVID War and lockdowns], as a result of this massive geopolitical shock we’re facing now,” she said, referring to Russia’s war in Ukraine.
These forces “are going to change the picture and the landscape within which we operate,” she noted. “I don’t think we’re going back to that environment of low inflation.”
The COVID era has created “a sea change” in the way national economies work, Bailey pointed out, “leaving a structural legacy on labor markets and the way they behave.”
If banks fail to raise interest rates forcefully and quickly, inflation might become deeply rooted in national economies, which likely would require central banks to act so strongly that the world’s economy might crash, they implied.
The problem arose from major Western central banks failing to recognize inflation’s strength or persistence.
Through virtually all of 2021, central bank officials believed they could hold interest rates steady until at least 2023, if not longer. Lagarde repeatedly confirmed that the ECB would not raise its rate until 2024 at the earliest.
However, as prices soared at the fastest rate in 40 years, the banks were forced to scrap their plans.
In March, the Fed began a steady series of interest rate increases that will bring its base rate from 0.25 percent at the beginning of this year to 3 percent or higher by January.
The ECB has been forced to signal that it will increase rates this month, as we noted in “ECB Signals Rate-Hike Plan” (14 Jun 2022).
The Bank of England has raised its rates five times since 2021.
“The aim is to slow growth down so that supply can catch up,” Powell said. “It’s a necessary adjustment.”
Europe and the U.K. have been battered by particularly high energy costs, leading economists to fear so-called “second-round” inflation, in which businesses raise prices to cover higher fuel costs and workers demand higher wages to maintain their purchasing power.
The world’s economy risks “a stagflationary hard landing”—a stagnant economy amid rising prices—if central banks raise interest rates so high so quickly that economies stall, financial markets choke, and highly leveraged companies default on their debts, the Bank for International Settlements warned last week in its annual report.
Bringing the global economy in for a soft landing, with inflation tamed and economies expanding, has “gotten harder; the pathways have gotten narrower,” Powell acknowledged.
“Nevertheless, that is our aim,” he said.
Correcting inflation will involve “some pain,” Powell said again, but worse pain will result if inflation is not halted and reversed, he added.
PUBLISHER’S NOTE: Fed Head Powell may have good intentions, but his record of performance is something less.
At a December 2020 press conference, Powell pointed to “disinflationary pressures around the globe” and said “it’s not going to be easy to have inflation move up.”
A month later, with inflation on the move well above the Fed’s 2-percent target rate, Powell said it was only “temporary.”
In July, with inflation running at 5 percent, Powell told a Congressional committee that “we really do believe that these things will come down of their own accord as the economy reopens,” he noted.
Wrong, wrong, and wrong.
As we noted in “Fed: Stronger Economy, Steady Rates” (23 Mar 2021), Fed officials predicted overall U.S. inflation would be 2.4 percent for the year.
Instead, it topped 6 percent in October and averaged 4.1 percent from January through October in 2021.
Until November, Powell and the Fed’s Open Market Committee were referring to inflation as “temporary,” which became “transitory,” a more useful weasel word as what Powell had called “temporary” stretched into its 10th month.
In December 2021 testimony to Congress, Powell admitted it is “probably a good time to retire” the Fed’s characterization of inflation as transitory.
TREND FORECAST: The U.S. and much of the world has already arrived at that “new economic landscape.”
Instead of stagflation, the new landscape has turned out to be our Top 2022 Trend of Dragflation: prices are rising as economies are slowing, with the U.S. entering its second consecutive quarter of economic contraction (see Consumer Spending Slowed Again in June in this issue) and other countries following suit.
In this new reality, the central bank’s ability to raise interest rates will not be enough to tame inflation. Prices will begin to fall when consumers stop spending, a trend now taking hold, as we noted in the article cited above.
Barring a surprise event, much of the world will have sunk into Dragflation before this year ends.
EV STICKER SHOCK SETS IN AS BATTERY MATERIAL COSTS SOAR
The average U.S. price paid for an electric vehicle (EV) in May was about $54,000, fully 22 percent higher than a year earlier, according to J.D. Power.
The price of a conventional internal-combustion car gained 14 percent over the same time.
EV prices have jumped partly because makers and dealers are capitalizing on EVs’ newfound popularity in an era of $5 gasoline.
However, most of the price bump is the result of increases in the cost of EVs’ battery materials. Batteries can make up as much as 40 percent of an EV’s price.
Nickel and cobalt prices have more than doubled this year, although they have eased recently; lithium batteries’ central ingredients rocketed up 700 percent in price over the past 12 months.
Last week, General Motors raised the price of its Hummer EV pickup truck by $6,250, putting the base price at about $85,000. The truck has a customer waiting list two years long.
This year, Tesla has boosted the price of its Model Y SUV three times, raising the price a total of about 9 percent to $69,900.
The elevated prices come at a time when auto companies have doubled their investment in EV development and are slated to spend an estimated $526 billion over a five-year period ending in 2026, The Wall Street Journal said.
Despite rising costs and higher sticker prices, automakers are undeterred, believing customers’ enthusiasm will triumph, the WSJ noted.
“The demand for EVs right now is extremely robust so we have, we believe, opportunity for pricing,” Ford CEO James Farley said in an April analysts call.
“We’re in a world where it almost seems [unlimited] in terms of willingness to pay,” R.J. Scaringe, CEO of electric truck maker Rivian, told an industry conference in June.
“However, we don’t believe this will forever be the case,” he added.
Rivian raised its prices in March by as much as 20 percent on some models.
Perhaps because of rising prices, EVs have accounted for only about 5 percent of U.S. auto sales this year, the WSJ reported.
Automakers will have to find a way to make EVs affordable to more than the wealthy, J.D. Powers vice-president Tyson Jominy told the WSJ.
General Motors may have gotten that message.
The company has taken $6,000 off the base price of its Chevrolet Bolt EV, partly to polish the car’s image after a massive recall earlier this year to fix battery problems but also to compete as an affordable alternative.
TRENDPOST: EVs’ market is similar to that for houses.
Demand is strong relative to the past, prices are at their peak, and supplies are short. (Volkswagen announced that its EVs are sold out until some time next year, as we reported in “French and German Factory Output Sags in March,” 10 May 2022).
The U.S. transportation transition away from fossil fuels now depends on two things.
First, new and cheaper battery chemistries must drive the next generation of EVs.
We have reported on several, including Alsym Energy’s water-based cell that we detailed in “A Battery That Runs on Water” (28 Jun 2022).
Second, U.S. regulators would need to open American ports to EV imports from China and other Asian nations. Even as materials costs rise, these vehicles retail in their domestic markets for about half of what brand-name EVs do here.
Adding shipping charges and dealers’ mark-up still would price these imports closer to the budgets of middle-income America.
ERDOGAN RAISES TURKEY’S MINIMUM WAGE BY 30 PERCENT
With his country’s inflation rate reaching 74 percent in May, Turkey’s president Recep Erdogan has raised the minimum wage by 30 percent to slow the pace at which workers lose purchasing power.
The raise is the second this year. The first came in January.
About 40 percent of Turkey’s workers will now earn more.
“We are taking many measures to compensate for the loss of prosperity of all of our people, especially our workers,” Erdogan said in a 1 July public statement.
So far this year the Turkish lira has lost about 20 percent of its value.
As a result, the new raise has an actual value of about $9 a month, the Financial Times reported.
Inflation is rampant and the lira sinking due to Erdogan’s erroneous economic policies.
Contrary to economic theory and historical experience, Erdogan has prevented the country’s central bank from raising interest rates to tame inflation, as we have reported in numerous articles, including:
- “Turkey’s Central Bank Governor Fired After Rate Hike” (23 Mar 2021)
- “Turkey’s Financial Markets Crash After Agbal Firing” (30 Mar 2021)
- “Turkey: Another Day, Another Central Bankster Fired” (1 Jun 2021)
- “Turkey: Interest Rates Down, Lira Crashing. War Next?” (19 Oct 2021)
- “Turkey’s Economy Continues to Implode” (14 Dec 2021)
- “Turkey’s Inflation Rate Nears 50 Percent” (8 Feb 2022)
- “Turkey’s Bonds Downgraded, Worse to Come” (22 Feb 2022)
- “Turkey’s Economy Weakens Further Under Erdogan’s Policy” (14 Jun 2022)
Raising the minimum wage while inflation is rampant is likely to force raises for other workers and, ultimately, to drive inflation higher, analysts told the FT.
The new wage boost will add six points to the country’s inflation rate by the end of this year, Turkish economist Haluk Burumcekci [sic] told the FT.
“Salary increases are of no use until Erdogan puts a halt to inflation,” Engin Ozkoc, an opposition party politician, tweeted.
Erdogan, who has ruled Turkey for 20 years, is watching his popularity fall with the lira’s value. He faces re-election no later than next June.
Instead of allowing the country’s central bank to raise interest rates, Erdogan says he is creating a “new economic model” in which a worthless lira will make Turkey’s exports cheap abroad, ringing in a new era of prosperity.
Turkey will “leave inflation behind” as 2023 begins, he has predicted.
TREND FORECAST: Erdogan’s instinct is for choosing the most destructive economic policies. He has become so deeply invested in them that abandoning them now would be a public admission of his incompetence.
Instead, as next year’s election nears, Erdogan and his hand-picked sycophants at Turkey’s central bank will craft new short-term measures that will loot the bank’s reserves to give the lira CPR.
As he becomes more desperate, domestic protests will increase. This will give Erdogan a pretext to find “terrorists” and “foreign troublemakers” among his critics, cracking down even more on personal freedoms and increasing the chances of a rigged election in his favor next year.
Ultimately, Erdogan may seek to distract his nation with military action. As Gerald Celente often says, “When all else fails, they take you to war.”
COPPER’S PRICE SLIPS AS GLOBAL ECONOMY SLOWS
On 1 July, the price of copper dipped 3 percent to fall below $8,000 a ton for the first time in more than 17 months as the world’s factories produce fewer goods, as we report in “Global Factory Output Slows as Consumers Cut Spending” in this issue.
Earlier this year, copper posted a record price above $10,700 per ton but has now fallen about 20 percent from that peak.
Used in every form of electrical appliance and machine, the metal is known as “Dr. Copper” for the ability of its price to diagnose the health of the world’s economy.
The sliding price indicates that the recent post-lockdown boost in China’s economic activity is “not enough to offset the potential slowdown in developed economies,” analysts at Australian bank ANZ wrote in a new report.
From early April through June, copper futures contracts on the London Metal Exchange (LME) suffered their worst quarterly performance since 2012, the Financial Times reported.
Recessions in the U.S. and Europe would mean copper’s market would face a 10-percent surplus over the next two years, with China’s economy too constrained to make up the difference, FT Futures predicted.
Copper closed in London at TK on Tuesday, 4 July.
Other metals also are skidding.
The LME’s index of six base metals took their worst quarterly beating since the Great Recession and the Panic of 2008. Aluminum’s price was down 2 percent and nickel off 3 on the first trading day of the new quarter.
TRENDPOST: Metals prices are leading indicators of the economy’s direction. The speed at which they fall, and the levels to which they sink, are barometers of the global economic slowdown’s progress.
Although the global economic slowdown and Dragflation, our Top 2022 Trend now under way, will bring metals prices lower, demand will remain above mines’ and processors’ capacities to meet it.
As a result, many metals’ prices will not return to pre-COVID levels.