Investors bet on firmer Fed action as US inflation soars

Good evening,

Survey data today showed US consumer sentiment at its lowest point in more than 10 years, as rising prices take their toll on Americans’ optimism about the economy and their personal finances.

The survey follows yesterday’s news of the biggest jump in US inflation for 40 years. The increase in the consumer price index (CPI) to 7.5 per cent was much higher than expected and puts extra pressure on the US Federal Reserve to speed up its tightening of monetary policy.

Traders now expect a sizeable rate rise next month or even a move by the Fed in between scheduled policy meetings for the first time since 1994. This mood was further fuelled by Fed policymaker James Bullard’s call for 100 basis points worth of rate rises by July 1. The yield on the US 10-year Treasury, a benchmark for international investors and critical for mortgage rates and corporate borrowing costs, yesterday passed 2 per cent for the first time since August 2019.

High inflation has tarnished US president Joe Biden’s otherwise strong economic record of jobs and wage growth as well as helping quash his $1.75tn spending proposals, which some argued would lead prices even higher.

Inflationary fears are also growing across the Atlantic. Brussels cut growth forecasts for the eurozone and wider EU yesterday to 4 per cent for 2022, from its autumn forecast of 4.3 per cent. It now expects inflation to hit 3.5 per cent in the eurozone and 3.9 per cent in the EU this year before falling back to 2 per cent in 2023.

Russia’s central bank, which has been one of the world’s most aggressive in raising interest rates to try and rein in inflation, today increased rates to a five-year high of 9.5 per cent, citing in particular a tight labour market.

In the UK meanwhile, last week’s comments from Bank of England governor Andrew Bailey that wage demands should be moderated to avoid a wage-price spiral are still causing a stir.

Increases in costs have also been a strong theme in the current corporate earnings season. Volvo Cars today warned of price rises as the cost of raw materials bite, while jumps in commodity, shipping and labour costs have led to price increases at consumer companies such as PepsiCo and sellers of everything from pet food to burritos.

Soaring energy costs remain one of the biggest drivers of inflation and a drag on economic and corporate recovery, unless of course you happen to be a producer. Russia’s Rosneft and France’s Total are the latest to report rising profits thanks to high oil and gas prices.

The benchmark price of US crude rose more than 15 per cent in January and today hit $92.41 a barrel, close to its highest point since 2014. However, the International Energy Agency warned the price could rise further unless the Opec+ producer group addressed its “chronic underperformance” and increased output.

Use the FT’s inflation tracker to see the effect of price rises around the world

Latest news

• The Unison trade union has asked for guidance to prevent “super spreader free-for-all” workplaces when isolation requirements end in England (PA)

• Up to 3,000 New York City workers who remain unvaccinated are bracing for mass sackings (NYT)

• Italian prime minister Mario Draghi said economic growth had slowed in the first quarter and risks ahead could damage full-year prospects (Reuters)

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

Need to know: the economy

A better than expected UK GDP increase of 7.5 per cent in December is the country’s fastest spurt of growth since the second world war. In the three months to December, GDP was still 0.4 per cent below its pre-pandemic level however, in contrast with the US, China and the eurozone, which have all recovered lost ground.

The European Central Bank said it would raise capital requirements for banks unless they reduced exposure to risky loans, as it published its annual assessment of the 115 lenders it supervises. Separately, the European Systemic Risk Board, which is responsible for monitoring the financial system, said housing markets had “decoupled” from the rest of the economy since the pandemic struck, increasing risks for banks and contributing to rising household debt.

Latest for the UK and Europe

UK ministers are hoping regulatory changes that will allow insurance companies to invest billions of pounds more in infrastructure, including green energy projects, can provide the economy with a post-Brexit boost. Meanwhile, the FT City Network warned of the erosion of trust in UK politics and business.

FT analysis shows UK gas imports will increase substantially over the next 30 years, underlining the country’s reliance on overseas supplies. The UK already imports more than half of its gas and by 2030, this will rise to nearly 70 per cent. FT consumer editor Claer Barrett says the government’s energy rebate is failing to help the poorest.

Global latest

The EU said it would give €125mn to help vaccine distribution in Africa after the UN-backed Covax programme said shortages of syringes and medical equipment was hampering its efforts. According to the World Health Organization, $23bn is needed to help low and middle-income countries end the emergency phase of the pandemic. The experience of Malawi highlights the logistical challenges they are up against.

President Cyril Ramaphosa said South Africa, the first major country to be hit by the Omicron variant, would lift its pandemic national state of disaster to enter a “new phase” of dealing with the virus.

Hong Kong stands as a reminder that Omicron is not done yet. The Mandarin Oriental hotel group is looking to temporarily relocate staff as restrictions bite.

Need to know: business

A parliamentary report said UK tax authorities were “soft on fraud” over the “unambitious” plan to recover the almost £6bn paid out incorrectly by the Covid support scheme.

Carmakers shut plants in the US and Canada as protests by Canadian truckers over mandatory vaccination escalated, putting further pressure on already under-strain supply chains.

There were no such qualms from AstraZeneca, whose sales of vaccines helped it to achieve a record $12bn in fourth-quarter revenues and announce an increase in its dividend. The UK pharma company sold its first jabs, which are significantly cheaper than the mRNA shots from BioNTech and Pfizer, on a non-profit basis but did not give detail of revenues from new contracts.

Despite the backdrop of soaring raw materials prices and supply chain bottlenecks, German conglomerate giants Siemens and Thyssenkrupp reported stellar results for the last quarter of 2021.

Science round up

Pandemic management: As we wrote in our last edition, recent announcements have fuelled a feeling that the end of Omicron is in sight. One prominent epidemiologist, referring to the lifting of restrictions in England, adds an important caveat: “It could be the last time we have legal limits in place but it doesn’t mean the end of the pandemic. ​The virus has been one step ahead of us every time . . . we can’t just ignore it. That would be folly.”

The total number of global infections has now passed 400mn. Use our coronavirus tracker to compare the situation across the world.

Vaccines: Science columnist Anjana Ahuja examines what malaria research can tell us about vaccinating children against Covid.

Our Big Read looks at the race for a “super jab” that could offer protection not only against new variants of the current virus but any future coronaviruses that may emerge.

Get the latest worldwide picture with our vaccine tracker

And finally…

Organisers hope next month’s Academy Awards can be a comeback story after last year’s low-key (and low TV ratings) ceremony. Film critic Danny Leigh looks at this year’s Oscar contenders.