Speech by Governor Christopher J. Waller at the 2023 Arkansas State University Agribusiness Conference, Jonesboro, Arkansas, February 08, 2023 |
Thank you, Bert, and thank you for the opportunity to talk about where the economy is heading, what the Federal Reserve is doing to get inflation back down to our 2 percent goal, and how all that is likely to affect American agriculture.1
The big picture is that the U.S. economy is adjusting well so far to the higher interest rates that are necessary to rein in inflation. But inflation remains quite elevated, and so more needs to be done. Although economic activity slowed in 2022, I expect the Fed will need to keep a tight stance of monetary policy for some time to slow activity further in 2023. That is what I believe is needed to bring demand and supply into better alignment and lower inflation toward the Federal Open Market Committee’s (FOMC) 2 percent target. Some believe that inflation will come down quite quickly this year. That would be a welcome outcome. But I’m not seeing signals of this quick decline in the economic data, and I am prepared for a longer fight to get inflation down to our target.
So, what is my take on the recent data? It looks like the economy grew at a solid pace in the final quarter of the year, the labor market remained tight, and inflation continued to retreat. After adjusting for inflation, personal consumption grew at around a 2 percent rate, though it contracted in the last two months of the year amid some pretty significant headwinds.
One of those headwinds was high inflation, including for food and agricultural products. After accounting for inflation, spending on food consumed at home fell in 2022 after rising strongly in 2020 and 2021, the effect of both large price increases over the past year and the normalization of spending on groceries, which surged when people stayed home during the pandemic and reversed when they returned to restaurants.
Looking forward, I expect personal consumption will grow modestly and price increases will moderate, and I think such outcomes would bode well for the agricultural sector this year. It looks as though economic activity may be moderating further in the first quarter of 2023, but I expect the U.S. economy to continue growing at a modest pace this year, supported by a strong labor market and by encouraging progress in lowering inflation.
Though we have made progress reducing inflation, I want to be clear today that the job is not done. Inflation is still too high relative to the price stability goal of the dual mandate assigned to the Federal Reserve by Congress. The Fed has defined that goal as 2 percent annual inflation, as measured by the change in the price index for personal consumption expenditures, but another yardstick you could use is when high prices for groceries and other things are no longer front page news, and when farmers can worry less about rising costs for fertilizer and other inputs.
That is where we intend to get to, and thus the FOMC last week increased the target range for the federal funds rate by another 25 basis points, to 4-1/2 to 4-3/4 percent. Our intention is to tighten financial conditions, including raising the cost of credit, to dampen demand and spending to further reduce inflation. Of course, we know that higher interest rates pose challenges for farmers and ranchers who must borrow to smooth out the costs and returns from agriculture over the year. But excessive inflation is a larger challenge because it has the potential to become a lasting problem weighing on economic growth, undermining living standards, and hurting consumers, who farmers depend on. That is why I am determined to get the job done, get high inflation off the front pages, and back to being something that households and businesses don’t think too much about when making decisions.
Continued upward pressure on inflation comes, in part, from a very tight labor market. The Job Openings and Labor Turnover Survey for December continued to show that the demand for workers remains robust, with job openings increasing by over 500,000 at the end of last year. Based on last Friday’s initial estimate, we learned that the U.S. economy created a whopping 517,000 jobs in January, 330,000 more than the solid growth that was expected by economic forecasters. Furthermore, the unemployment rate ticked down to 3.4 percent, the lowest level since 1951.
Such employment gains mean labor income will also be robust and buoy consumer spending, which could maintain upward pressure on inflation in the months ahead. For employers, the very strong labor market makes it hard to find and retain workers. One effect of this tightness is seen in wages and other compensation, which ultimately show up in the prices that consumers pay for goods and services. For example, last year the Employment Cost Index (ECI), which tracks movements in labor costs, including both wages and benefits, increased over 5 percent, the highest rate since 1984. We want to see wages grow but at a pace that is consistent with our goal of stable prices.
We have seen some moderation in compensation growth in recent months but not enough. The ECI for hourly compensation for private industry workers increased at an annual rate of 4 percent over the three months ending in December, a step down from the 4.3 percent gain recorded over the three months ending in September and the 6.3 percent increase in June but still a strong increase. More recently, the 12-month change in a narrower measure of labor costs, average hourly earnings, was about 4-1/2 percent in January, continuing its slow deceleration from 5-1/2 percent last summer. The data are moving in the right direction, but I will watch for further slowing because we don’t want excessive wage increases to be a potential source of higher inflation in the future.
So now let’s talk about inflation. I will start with overall inflation and then focus on the different components, including food. I will talk about what those components can tell us about the direction of overall inflation and how I look at the different parts of inflation in my approach to monetary policy.
Figure 1 depicts inflation measured by two common indexes. No matter how one measures it, inflation has been running too hot for too long. “Overall” or “headline” inflation indexes are measured as the rate of increase in the average price level of a broad group of goods and services, called a market basket. Government statistics on the inflation rate will be a function of the specific goods and services included in the market basket. Including a different set of goods and services in the market basket will result in a different overall inflation rate.
Probably the most often-discussed inflation measure in the United States is one based on the consumer price index (CPI). The CPI is widely used as a cost-of-living index to adjust Social Security and other payments. The CPI puts considerable weight on the prices of food, energy, and shelter. These three items account for about 50 percent of the expenditures in the CPI basket.2
A second measure that is frequently watched is the one I mentioned earlier, the personal consumption expenditures (PCE) price index, which places less weight on food, energy and shelter—they make up about 30 percent of the expenditures in the PCE basket. The FOMC chose the PCE index over the CPI for its inflation target in part because it includes a broader set of goods and services in its market basket and is widely believed to better capture changes in the mix of goods and services purchased by consumers.
Monetary policy works with a lag, and after the Federal Reserve started raising interest rates last March, inflation peaked in the middle of 2022 and has been falling gradually since then. Twelve-month PCE inflation hit a high of 7 percent in June but ended the year at 5 percent. By comparison, over the final three months of 2022, headline inflation was much lower, running at an annualized rate of just 2.1 percent. The difference between the three-month and 12-months changes is a signal of ongoing moderation. As has been the case since the summer, falling energy prices are a big reason for lower inflation in the last few months, though food price inflation also moderated in the final few months of 2022.
These improvements are welcome news, but we need to keep them in perspective. As we can see in the figure, though PCE inflation is down from its peak, it is still quite elevated. And while the recent trend is encouraging, the improvements over the past year have been coming in ebbs and flows and it likely will continue this way. I need to be confident that inflation is declining in a sustained manner towards our 2 percent target, so I will need to see continued moderation in inflation before my outlook changes.
So where do I think inflation is heading? You will often hear economists talk about core inflation, which strips out energy and food prices, which tend to be volatile. The core measure is considered a better guide to the direction of future inflation. You might wonder why it is that the Fed doesn’t just target core inflation in measuring progress toward our price stability goal. There are some good reasons for keeping the focus on overall inflation, and in front of an audience of people who pay a lot of attention to food price inflation, I thought I would take a couple minutes to explain why I consider food and all of the components of inflation to be so important in my approach to setting monetary policy.
The argument for stripping out food and energy prices is that they tend to be quite volatile, with big ups and downs tending to equal out over time, and thus do not provide a clear signal of how inflation in these categories will evolve. One can see the recent volatility in figure 2 that reports 12-month rates of inflation for food and energy. Energy prices were decreasing for most of 2020 (they fell 10 percent during that period) but then switched to very large increases in 2021 and the first half of 2022. In mid-2022 we saw energy prices up about 40 percent from the year before. By December, that retraced to less than a 7 percent increase over 2021. And I’m sure I don’t have to tell anyone that food inflation has been quite high relative to its pre-pandemic average. Of course, food prices haven’t increased as much as energy prices, but food inflation has risen notably in 2021 and 2022 and has been running above 10 percent recently, which is unusually high. I know that farmers have been dealing with sharply rising input costs, and that is a significant factor driving up wholesale and retail prices for many food products. As shown in figure 3, inflation for agricultural chemicals, such as fertilizer, skyrocketed in 2021 and continued up in early 2022 and, though this inflation has moderated in recent months, the price level of agricultural chemicals remains very high.
Core inflation, as shown in Figure 4, didn’t rise as much as headline inflation in this recent period of high food and energy price increases, and lately it hasn’t moderated as much. Core inflation stood at 4.4 percent in December, over double the Fed’s 2 percent target for headline inflation. Core inflation includes a measure of housing services, which is what households pay for rent or the equivalent for those who own their homes. Housing services inflation has been stubbornly high for all of 2022 and is a big factor driving up core inflation. There is good reason to believe rents will moderate significantly over this year and so some people have suggested that the focus should be on a “super core” measure of inflation that excludes food, energy, and housing. That would make inflation look not nearly as bad over the last year or two and also likely not show much improvement in the coming months.
But there are a few reasons why I don’t let these stripped-down measures of inflation shape my views of the inflation environment. First, yes, historically food and energy prices have been volatile, and it has not been unusual to see price increases followed by price declines over fairly short periods of time, but that isn’t the recent history. In the last two years, prices for these goods and services have been moving largely in one direction—up—and even the decline in energy prices we saw in the second half of 2022 hasn’t offset the huge increases earlier.
The second reason that I wouldn’t exclude food, energy, and housing prices, or want to move toward a narrower inflation target, is that, by any measure of headline inflation, they constitute a large share of expenses paid by people. Excluding this large share of consumer spending doesn’t give you an accurate picture of what consumers are facing in their everyday lives, and that is a perspective that policymakers should never forget.
The third reason to include, rather than exclude, these prices in considering inflation is that they make up an even larger share of expenses for lower-income people, who have less savings and other means to deal with the ups and downs of their finances and the economy. Recent research indicates that the share of overall spending that lower-income households dedicate to food, energy and housing is about 1.2 times (or 20 percent more) than the share spent by higher-income households. Because of this disparity, when inflation peaked last summer, lower-income households effectively faced inflation that was a percentage point higher than was paid by higher-income households.3
Lastly, and this is really the bottom line, the Fed has stated that its target for inflation is headline PCE prices. So, to meet the Fed’s price stability objective, policymakers are accounting for all the categories of goods and services that affect households.
With that context, let me take a few minutes on each of the three big categories to highlight how they have been moving, and I think there is some good news. Let’s look at each category in the order of how much consumers spend on them each month. Housing services are about 15 percent of the PCE basket. Figure 5 shows how housing inflation has been evolving both when measured on a 12-month basis (left panel) and 3-month basis (right panel). As I just noted, housing inflation has been stubbornly elevated. This is true if you look at inflation over the past year or just at recent months. But high frequency measures of market rents (for new leases by new tenants) have slowed sharply, suggesting an upcoming slowing in the rate of inflation in this part of the PCE basket. Because rents usually don’t change until leases run out, these recent declines in market rent inflation will only show through to the official inflation measure with a delay. So I expect, over time, that housing inflation will move down to be more in line with core inflation.
Turning to food, which represents about 7.5 percent of consumption in the PCE basket, figure 6 shows that the 12-month change in PCE food prices has greatly outpaced that of core PCE inflation over the past couple of years. More recently, we can see that the 3-month change in the PCE price index for food has slowed considerably, which is a good sign. But food inflation is still above the average annual pace of 1.1 percent over the ten years preceding the pandemic. This ongoing elevated food inflation likely reflects passthrough of the past strong increases in food commodity prices, rising labor and fuel costs, as well as supply-chain bottlenecks in packaging and transportation that have limited supplies amid strong demand. For example, as seen in figure 7, spot prices for cattle and soybeans are well above their levels at the onset of the pandemic, likely boosted by the sharply rising input costs farmers have been facing, which I discussed earlier. However, futures prices for these commodities suggest limited movements in these prices through year end. If this plays out, with a slowdown in wage increases that should occur because of tighter monetary policy, this should help continue to moderate food inflation over the next few years.
Finally, let’s turn to energy inflation. Households spend less than 5 percent of their PCE basket on gasoline, electricity, and heating but, as seen in the left panel of figure 8, the energy price index skyrocketed over the past couple of years, reflecting a surge in crude oil prices after the pandemic recession which was exacerbated by Russia’s invasion of Ukraine. Turning to the 3-month change (the right panel) energy prices have been declining sharply recently and we expect them to continue to decline this year, reflecting the path of crude oil futures prices and the expectation that unusually elevated gasoline margins will, on average, decline over the remainder of this year.
So, what do I take away from all this? I think there are practical implications for getting a clear picture of the economy and setting appropriate monetary policy, and also a reminder for me about the trust I bear as a public official.
Most practically, if I had focused on core inflation over the last two years and tended to look past increases for food and energy, and especially for housing, I would have missed an alarming increase in inflation, and reacted more slowly than my Federal Reserve colleagues and I appropriately did to start bringing down inflation. The Federal Open Market Committee raised interest rates more quickly than it had in more than forty years, and I think the progress we have made on inflation shows how important it was to act so urgently.
Just as importantly, excluding those prices would have neglected how much hardship this high inflation has been for many people, especially lower-income individuals and families. High inflation is a very different experience when you are effectively paying a higher rate than others, when a higher share of your expenses and income are spent on necessities, and when you have little in savings to draw on, as lower-income people do. When I talk about how important it is to win this inflation fight, it is partly in recognition of this inescapable reality for many millions of people.
Fortunately, there are signs that food, energy, and shelter prices will moderate this year. An important factor has been the Federal Reserve’s ongoing fight to lower inflation through tighter monetary policy. We are seeing that effort begin to pay off, but we have farther to go. And, it might be a long fight, with interest rates higher for longer than some are currently expecting. But I will not hesitate to do what is needed to get my job done.
Compliments of the U.S. Federal Reserve.
Footnotes:
1. I am grateful to Katia Peneva for assistance in preparing these remarks. These remarks represent my own views, which do not necessarily represent those of my colleagues on the Federal Reserve Board and the Federal Open Market Committee. Return to text
2. Food at home, energy and housing represent 49 percent of the CPI basket, whereas all food, energy and housing are 54 percent of the market basket. Return to text
3. Based on work by Jake Orchard (2022) that matches consumption spending by income with CPI data. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4033572. Return to text

The post Speech: U.S. FED | The Inflation Rate for Necessities: A Look at Food, Energy and Shelter Inflation first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Trade openness increased after the Second World War, but has slowed following the global financial crisis

The free flow of ideas, people, goods, services, and capital across national borders leads to greater economic integration. But globalization, the trend toward these things moving ever more freely between nations, has seen ebbs and flows over the decades.
Those trends are coming into sharper focus this year as policymakers work to understand and address the prospect of geoeconomic fragmentation, which threatens to undo the integration that has improved the lives and livelihoods of billions of people.
Looking back over a century and a half of data, the main phases of globalization are clearly visible using the trade openness metric—the sum of exports and imports of all economies relative to global gross domestic product.
As the Chart of the Week shows, globalization plateaued in the decade and a half since the global financial crisis. This latest era is often referred to as “slowbalization.”

Each of the chart’s five main periods was characterized by different configurations of economic and financial powers, and different rules and mechanisms for economic and financial ties between countries, as we recently highlighted in a recent IMF staff note that discussed the impact of trade fragmentation as well as technological decoupling.

The Industrialization era was a period when global trade—dominated by Argentina, Australia, Canada, Europe, and the United States—was facilitated by the gold standard. It was largely driven by transportation advances that lowered trade costs and boosted trade volumes.
The Interwar era saw a dramatic reversal of globalization due to international conflicts and the rise of protectionism. Despite the League of Nations push for multilateral cooperation, trade became regionalized amid trade barriers and the breakdown of the gold standard into currency blocs.
The Bretton Woods era saw the United States emerge as the dominant economic power with the dollar, then pegged to gold, underpinning a system with other exchange rates pegged to the greenback. The post-war recovery and trade liberalization spurred rapid expansion in Europe, Japan, and developing economies, and many countries relaxed capital controls. But expansionary US fiscal and monetary policy driven by social and military spending ultimately made the system unsustainable. The United States ended dollar-gold convertibility in the early 1970s, and many countries switched to floating exchange rates.
The Liberalization era saw gradual removal of trade barriers in China and other large emerging market economies and unprecedented international economic cooperation, including the integration of the former Soviet bloc. Liberalization accounted for most of the increase in trade, and the World Trade Organization, established in 1995, became a new multilateral overseer of trade agreements, negotiations and dispute settlement. Cross-border capital flows surged, increasing the complexity and interconnectedness of the global financial system.
The “Slowbalization” that followed the global financial crisis has been characterized by a prolonged slowdown in the pace of trade reform, and weakening political support for open trade amid rising geopolitical tensions.

Authors:

Shekhar Aiyar
Anna Ilyina

Compliments of the IMF.
The post IMF | Charting Globalization’s Turn to Slowbalization After Global Financial Crisis first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Union – together with the international G7+ Price Cap Coalition – have today adopted further price caps for seaborne Russian petroleum products (such as diesel and fuel oil). This decision will hit Russia’s revenues even harder and reduce its ability to wage war in Ukraine. It will also help stabilise global energy markets, benefitting countries across the world.
It comes on top of the price cap for crude oil in force since December 2022, and will complement the EU’s full ban on importing seaborne crude oil and petroleum products into the European Union.
Ursula von der Leyen, President of the European Commission, said: “We are making Putin pay for his atrocious war. Russia is paying a heavy price, as our sanctions are eroding its economy, throwing it back by a generation. Today, we are turning up the pressure further by introducing additional price caps on Russian petroleum products. This has been agreed with our G7 partners and will further erode Putin’s resources to wage war. By 24 February, exactly one year since the invasion started, we aim to have the tenth package of sanctions in place.”
Two price levels have been set for Russian petroleum products: one for ”premium-to-crude” petroleum products, such as diesel, kerosene and gasoline, and the other for ”discount-to-crude” petroleum products, such as fuel oil and naphtha, reflecting market dynamics. The maximum price for premium-to-crude products will be 100 USD per barrel and the maximum price for discount-to-crude will be 45 USD per barrel.
The price cap on petroleum products will be implemented from 5 February 2023. It includes a 55-day wind-down period for seaborne Russian petroleum products purchased above the price cap, provided it is loaded onto a vessel at the port of loading prior to 5 February 2023 and unloaded at the final port of destination prior to 1 April 2023.
The price caps for petroleum products and crude oil will be continually monitored to ensure their effectiveness and impact. The price caps themselves will be reviewed and adjusted as appropriate.
The European Commission has also published today a guidance document on the implementation of the price caps.
Background
The Price Cap Coalition is composed of Australia, Canada, the EU, Japan, the UK, and the US.
The EU’s sanctions against Russia are proving effective. They are damaging Russia’s ability to manufacture new weapons and repair existing ones, as well as hinder its transport of material while reducing its revenues from fossil fuels exports. In response to Belarus’ involvement in Russia’s military invasion of Ukraine, the EU has also adopted a variety of sanctions against Belarus in 2022.
The geopolitical, economic, and financial implications of Russia’s continued aggression are clear, as the war has disrupted global commodities markets, especially for agrifood products and energy. The EU continues to ensure that its sanctions do not impact energy and agrifood exports from Russia to third countries.
As guardian of the EU Treaties, the European Commission monitors the enforcement of EU sanctions across the EU.
The EU stands united in its solidarity with Ukraine, and will continue to support Ukraine and its people together with its international partners, including through additional political, financial, and humanitarian support.
Compliments of the European Commission.
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The ECB has asked people in the euro area how they pay and which payment methods they prefer. The ECB Blog discusses our survey findings and what they mean for the future of cash and digital means of payment.

Digitalisation has changed, and will continue to change, the way people make payments. Today’s payment options are in some ways unrecognisable from what was available a decade ago. Using a device or app, you might pay for your groceries with your watch today, and use an app tonight to share costs and settle up with your dinner date before your plates are even cleared.
But to be clear: cash remains the most frequently used means of payment. More than half of all day-to-day transactions in shops, restaurants, etc. are made using coins and banknotes. Many languages in Europe have expressions such as “cash is king” or “nur Bares ist Wahres” and our survey shows that 60% of citizens want to have the option of using cash.
Cash remains the most frequently used means of payment
More and more people are paying online for their day-to-day purchases. But with the increase of digital payment options, how do we know that a majority of consumers still want physical cash in their pockets? Well, we ask them. The study on the payment attitudes of consumers in the euro area[1] (SPACE) is conducted on a regular basis and sheds light on payment trends. It’s an important activity given the ECB’s responsibility to issue public money and promote the smooth functioning of payment systems. The study demonstrates that cash is still the most frequently used means of payment at point of sale, although its use in the euro area has declined. In 2016 and 2019, 79% and 72% of the total number of transactions at points of sale, such as shops and restaurants, were made in cash.[2] In 2022, this figure had fallen to 59%. While the reason for this change cannot be determined unequivocally, it seems that consumption and payment behaviours learned during the pandemic outlasted the restrictions that caused them.

Chart 1
Number of payments at point of sale

Although most payments were still made in cash, 55% of euro area consumers prefer paying with card or other cashless means of payment. This is mostly due to the convenience of cashless payments: people do not need to carry hard cash. Still, cash is the preferred means of payment for 22% of those surveyed, largely because it helps to track people’s expenses and is more private.
Despite the preference for cashless payments, 60% of euro area consumers state that they value having the option to pay in cash. This shows that people appreciate having a choice when it comes to how they pay. Their decision may then depend on the particular situation or purchase.
What does all this mean for us at the European Central Bank?
A healthy payment system guarantees access to different payment options as well as the freedom to choose.

We will continue to support the availability of different payment instruments

As cash remains widely used and valued, we are committed to maintaining euro cash and will continue to make sure it is available. This means we will guarantee the supply of euro banknotes, coordinate their production, and ensure their security and resistance to counterfeiting. We are working on new themes and designs for future banknotes. The aim is to have banknotes with a look that is even more relatable to European citizens.
Moreover, we will continue to support the availability of different payment instruments. Compared to a decade or more ago, today’s payment options are far more diverse. To keep and further develop this diversity, we are working on the potential issuance of a digital euro. This will add another option for citizens to pay with central bank money, besides cash. We also continue to support point of sale and e-commerce solutions based on instant payments with a pan-European reach and European governance. Today and tomorrow, European citizens will pay with different methods but with the same stable, reliable money: the euro.
Authors:

Ulrich Bindseil, Director General
Doris Schneeberger

Compliments of the European Central Bank.
Footnotes:
1. ECB (2022), “Study on the payment attitudes of consumers in the euro area (SPACE) – 2022”, December.
2. Esselink, H., and Hernandez, L. (2017) “The use of cash by households in the euro area”, Occasional Paper Series, No 201, ECB, November.
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The fight against inflation is starting to pay off, but central banks must continue their efforts

The global economy is poised to slow this year, before rebounding next year. Growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity.
Despite these headwinds, the outlook is less gloomy than in our October forecast, and could represent a turning point, with growth bottoming out and inflation declining.
Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe. Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.
Elsewhere, China’s sudden re-opening paves the way for a rapid rebound in activity. And global financial conditions have improved as inflation pressures started to abate. This, and a weakening of the US dollar from its November high, provided some modest relief to emerging and developing countries.
Accordingly, we have slightly increased our 2022 and 2023 growth forecasts. Global growth will slow from 3.4 percent in 2022 to 2.9 percent in 2023 then rebound to 3.1 percent in 2024.

 
For advanced economies, the slowdown will be more pronounced, with a decline from 2.7 percent last year to 1.2 percent and 1.4 percent this year and next. Nine out of 10 advanced economies will likely decelerate.
US growth will slow to 1.4 percent in 2023 as Federal Reserve interest-rate hikes work their way through the economy. Euro area conditions are more challenging despite signs of resilience to the energy crisis, a mild winter, and generous fiscal support. With the European Central Bank tightening monetary policy, and a negative terms-of-trade shock—due to the increase in the price of its imported energy—we expect growth to bottom out at 0.7 percent this year.
Emerging market and developing economies have already bottomed out as a group, with growth expected to rise modestly to 4 percent and 4.2 percent this year and next.
The restrictions and COVID-19 outbreaks in China dampened activity last year. With the economy now re-opened, we see growth rebounding to 5.2 percent this year as activity and mobility recover.
India remains a bright spot. Together with China, it will account for half of global growth this year, versus just a tenth for the US and euro area combined. Global inflation is expected to decline this year but even by 2024, projected average annual headline and core inflation will still be above pre-pandemic levels in more than 80 percent of countries.

The risks to the outlook remain tilted to the downside, even if adverse risks have moderated since October and some positive factors gained in relevance.
On the downside:

China’s recovery could stall amid greater-than-expected economic disruptions from current or future waves of COVID-19 infections or a sharper-than-expected slowdown in the property sector
Inflation could remain stubbornly high amid continued labor-market tightness and growing wage pressures, requiring tighter monetary policies and a resulting sharper slowdown in activity
An escalation of the war in Ukraine remains a major threat to global stability that could destabilize energy or food markets and further fragment the global economy

A sudden repricing in financial markets, for instance in response to adverse inflation surprises, could tighten financial conditions, especially in emerging market and developing economies

On the upside:

Strong household balance sheets, together with tight labor markets and solid wage growth could help sustain private demand, although potentially complicating the fight against inflation
Easing supply-chain bottlenecks and labor markets cooling due to falling vacancies could allow for a softer landing, requiring less monetary tightening

Policy priorities
The inflation news is encouraging, but the battle is far from won. Monetary policy has started to bite, with a slowdown in new home construction in many countries. Yet, inflation-adjusted interest rates remain low or even negative in the euro area and other economies, and there is significant uncertainty about both the speed and effectiveness of monetary tightening in many countries.

 
Where inflation pressures remain too elevated, central banks need to raise real policy rates above the neutral rate and keep them there until underlying inflation is on a decisive declining path. Easing too early risks undoing all the gains achieved so far.
The financial environment remains fragile, especially as central banks embark on an uncharted path toward shrinking their balance sheets. It will be important to monitor the build-up of risks and address vulnerabilities, especially in the housing sector or in the less-regulated non-bank financial sector. Emerging market economies should let their currencies adjust as much as possible in response to the tighter global monetary conditions. Where appropriate, foreign exchange interventions or capital flow measures can help smooth volatility that’s excessive or not related to economic fundamentals.
Many countries responded to the cost-of-living crisis by supporting people and businesses with broad and untargeted policies that helped cushion the shock. Many of these measures have proved costly and increasingly unsustainable. Countries should instead adopt targeted measures that conserve fiscal space, allow high energy prices to reduce demand for energy, and avoid overly stimulating the economy.
Supply-side policies also have a role to play. They can help remove key growth constraints, improve resilience, ease price pressures, and foster the green transition. These would help alleviate the accumulated output losses since the beginning of the pandemic, especially in emerging and low-income economies.

Finally, the forces of geoeconomic fragmentation are growing. We must buttress multilateral cooperation, especially on fundamental areas of common interest such as international trade, expanding the global financial safety net, public health preparedness and the climate transition.
This time around, the global economic outlook hasn’t worsened. That’s good news, but not enough. The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting.

Compliments of the IMF.
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Today, the Commission presents a Green Deal Industrial Plan to enhance the competitiveness of Europe’s net-zero industry and support the fast transition to climate neutrality. The Plan aims to provide a more supportive environment for the scaling up of the EU’s manufacturing capacity for the net-zero technologies and products required to meet Europe’s ambitious climate targets.
The Plan builds on previous initiatives and relies on the strengths of the EU Single Market, complementing ongoing efforts under the European Green Deal and REPowerEU. It is based on four pillars: a predictable and simplified regulatory environment, speeding up access to finance, enhancing skills, and open trade for resilient supply chains.
Ursula von der Leyen, President of the European Commission, said: “We have a once in a generation opportunity to show the way with speed, ambition and a sense of purpose to secure the EU’s industrial lead in the fast-growing net-zero technology sector. Europe is determined to lead the clean tech revolution. For our companies and people, it means turning skills into quality jobs and innovation into mass production, thanks to a simpler and faster framework. Better access to finance will allow our key clean tech industries to scale up quickly.”
A predictable and simplified regulatory environment
The first pillar of the plan is about a simpler regulatory framework.
The Commission will propose a Net-Zero Industry Act to identify goals for net-zero industrial capacity and provide a regulatory framework suited for its quick deployment, ensuring simplified and fast-track permitting, promoting European strategic projects, and developing standards to support the scale-up of technologies across the Single Market.
The framework will be complemented by the Critical Raw Materials Act, to ensure sufficient access to those materials, like rare earths, that are vital for manufacturing key technologies, and the reform of the electricity market design, to make consumers benefit from the lower costs of renewables.
Faster access to funding
The second pillar of the plan will speed up investment and financing for clean tech production in Europe. Public financing, in conjunction with further progress on the European Capital Markets Union, can unlock the huge amounts of private financing required for the green transition. Under competition policy, the Commission aims to guarantee a level playing field within the Single Market while making it easier for the Member States to grant necessary aid to fast-track the green transition. To that end, in order to speed up and simplify aid granting, the Commission will consult Member States on an amended Temporary State aid Crisis and Transition Framework and it will revise the General Block Exemption Regulation in light of the Green Deal, increasing notification thresholds for support for green investments. Among others, this will contribute to further streamline and simplify the approval of IPCEI-related projects.
The Commission will also facilitate the use of existing EU funds for financing clean tech innovation, manufacturing and deployment. The Commission is also exploring avenues to achieve greater common financing at EU level to support investments in manufacturing of net-zero technologies, based on an ongoing investment needs assessment. The Commission will work with Member States in the short term, with a focus on REPowerEU, InvestEU and the Innovation Fund, on a bridging solution to provide fast and targeted support. For the mid-term, the Commission intends to give a structural answer to the investment needs, by proposing a European Sovereignty Fund in the context of the review of the Multi-annual financial framework before summer 2023.
To help Member States’ access the REPowerEU funds, the Commission has today adopted new guidance on recovery and resilience plans, explaining the process of modifying existing plans and the modalities for preparing REPowerEU chapters.
Enhancing skills
As between 35% and 40% of all jobs could be affected by the green transition, developing the skills needed for well-paid quality jobs will be a priority for the European Year of Skills, and the third pillar of the plan will focus on it.
To develop the skills for a people centred green transition the Commission will propose to establish Net-Zero Industry Academies to roll out up-skilling and re-skilling programmes in strategic industries. It will also consider how to combine a ‘Skills-first’ approach, recognising actual skills, with existing approaches based on qualifications, and how to facilitate access of third country nationals to EU labour markets in priority sectors, as well as measures to foster and align public and private funding for skills development.
Open trade for resilient supply chains
The fourth pillar will be about global cooperation and making trade work for the green transition, under the principles of fair competition and open trade, building on the engagements with the EU’s partners and the work of the World Trade Organization. To that end, the Commission will continue to develop the EU’s network of Free Trade Agreements and other forms of cooperation with partners to support the green transition. It will also explore the creation of a Critical Raw Materials Club, to bring together raw material ‘consumers’ and resource-rich countries to ensure global security of supply through a competitive and diversified industrial base, and of Clean Tech/Net-Zero Industrial Partnerships.
The Commission will also protect the Single Market from unfair trade in the clean tech sector and will use its instruments to ensure that foreign subsidies do not distort competition in the Single Market, also in the clean-tech sector.
Background
The European Green Deal, presented by the Commission on 11 December 2019, sets the goal of making Europe the first climate-neutral continent by 2050. The European Climate Law enshrines in binding legislation the EU’s commitment to climate neutrality and the intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.
In the transition to a net-zero economy, Europe’s competitiveness will strongly rely on its capacity to develop and manufacture the clean technologies that make this transition possible.
The European Green Deal Industrial Plan was announced by President von der Leyen in her speech at to the World Economic Forum in Davos in January 2023 as the initiative for the EU to sharpen its competitive edge through clean-tech investment and continue leading on the path to climate neutrality. It responds to the invitation by the European Council for the Commission to make proposals by the end of January 2023 to mobilise all relevant national and EU tools and improve framework conditions for investment, with a view to ensuring EU’s resilience and competitiveness.
Compliments of the European Commission.
The post The Green Deal Industrial Plan: putting Europe’s net-zero industry in the lead first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The press briefing ahead of the EU-Ukraine summit of 3 February 2023 will take place on Wednesday 1 February 2023 at 14.00. This briefing will be “off the record”.
The press briefing will take place in a hybrid format: EU accredited journalists will be able to participate and ask questions either in person at the Justus Lipsius press room or remotely.
To attend the events remotely, please use this link to register and have the possibility to ask questions.
EU accredited journalists who already registered for previous high level press events in 2022 do not need to do it again.

Deadline for registration: Wednesday 1 February 2023 at 13.00. 

Further instructions will be sent to all registered participants shortly after the deadline.
Compliments of the European Council, Council of the European Union.
The post Press briefing ahead of the EU-Ukraine summit of 3 February 2023 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

WASHINGTON –United States Secretary of Homeland Security Alejandro N. Mayorkas and European Commissioner for Internal Market Thierry Breton, released the following joint statement on the cooperation between the United States and the European Union in the fields of Cyber Resilience:
“Cyberspace knows no borders and it is only by working closely together with our allies and likeminded partners that we will succeed in securing our people, critical infrastructure, and businesses against malicious cyber activities. Today we launch a new chapter in our transatlantic partnership with three workstreams focused on deepening our cooperation on cyber resilience.
“In the context of the EU-US Cyber Dialogue, the US Department of Homeland Security and the European Commission’s Directorate-General for Communications Networks, Content and Technology intend to launch dedicated workstreams in the fields of Information Sharing, Situational Awareness, and Cyber Crisis Response; Cybersecurity of Critical Infrastructure and Incident Reporting Requirements; and Cybersecurity of Hardware and Software. The workstreams are expected to invite and involve as appropriate other relevant institutions and agencies working on cyber issues, including the European External Action Service, the Directorate-General for Defence, Industry, and Space, and the U.S. Department of State. In addition, a cyber fellowship led by DHS and DG CNCT is expected to be launched with a pilot that will involve an exchange of cyber experts in 2023.
“Today, we discussed the initial deliverables, which include:

Deepening structured information exchanges on threats, threat actors, vulnerabilities, and incidents to support a collective response to defend against global threats to include crisis management and support of diplomatic responses.
Finalizing a working arrangement between ENISA and CISA to foster cooperation and sharing of best practices.
Collaborating on the topic of cyber incident reporting requirements for critical infrastructure, including guidelines and templates.
Collaborating on the cybersecurity of software and hardware.
Exploring how we can work together to better protect civilian space systems.

“The launch of these workstreams reflects key elements in the joint statement between President Biden and President von der Leyen from March 2022, which called for deeper cooperation and more structured cybersecurity information exchanges on threats. The first deliverables from these workstreams are expected to be reported on at the 9th EU-US Cyber Dialogue, foreseen in the second half of 2023.”
Compliments of the European Commission.
The post Joint Statement by United States Secretary of Homeland Security Mayorkas and European Union Commissioner for Internal Market Breton first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Euro area net saving decreased to €678 billion in four quarters up to third quarter of 2022, compared with €731 billion one quarter earlier
Household debt-to-income ratio declined to 94.7% in third quarter of 2022 from 96.0% one year earlier
Non-financial corporations’ debt-to-GDP ratio (consolidated measure) decreased to 77.6% in third quarter of 2022 from 79.4% one year earlier

Total euro area economy
Euro area net saving decreased to €678 billion (6.5% of euro area net disposable income) in the four quarters to the third quarter of 2022, as compared with €731 billion one quarter earlier. Euro area net non-financial investment increased to €667 billion (6.4% of net disposable income), as investment by all four main sectors of the economy, namely households, general government, and non-financial and financial corporations, increased (see Chart 1).
Euro area net lending to the rest of the world decreased to €39 billion (from €214 billion in the previous quarter), as net saving decreased and non-financial investment increased. Net lending by households decreased to €318 billion (3.1% of net disposable income, after 3.6%). Net lending of non-financial corporations declined to €3 billion (0.0% of net disposable income, after 1.4%) while that of financial corporations was broadly unchanged at €68 billion (0.7% of net disposable income). The decrease in net lending by the total private sector was partially offset by a decline in net borrowing by the general government sector (-3.4% of net disposable income, after -3.6%).

Chart 1
Euro area saving, investment and net lending to the rest of the world
(EUR billions, four-quarter sums)

Sources: ECB and Eurostat.
* Net saving minus net capital transfers to the rest of the world (equals change in net worth due to transactions).

Data for euro area saving, investment and net lending to the rest of the world (Chart 1)
Households
Household financial investment increased at a broadly unchanged annual rate of 2.6% in the third quarter of 2022. This was due to higher growth rates of investment in currency and deposits (4.0%, after 3.7%) and debt securities (7.4%, after 0.0%), which were offset by a deceleration of investment in shares and other equity (1.4%, after 2.3%) and in life insurance (1.2%, after 1.6%) (see Table 1 below).
Households were overall net buyers of listed shares. By issuing sector, they were net buyers primarily of listed shares issued by non-financial corporations and the rest of the world (i.e. shares issued by non-euro area residents), and to a lesser extent of listed shares of MFIs, other financial institutions and insurance corporations. Households made net purchases of debt securities issued by general government and to a lesser extent non-financial corporations and MFIs, while selling debt securities issued by other financial institutions and the rest of the world (see Table 2.2. in the Annex).
The household debt-to-income ratio[1] decreased to 94.7% in the third quarter of 2022 from 96.0% in the third quarter of 2021. The household debt-to-GDP ratio declined to 58.2% in the third quarter of 2022 from 60.5% in the third quarter of 2021 (see Chart 2).

Table 1
Financial investment and financing of households, main items
(annual growth rates)

Financial transactions

2021 Q3
2021 Q4
2022 Q1
2022 Q2
2022 Q3

Financial investment*
4.0
3.5
3.0
2.7
2.6

Currency and deposits
6.2
4.9
4.2
3.7
4.0

Debt securities
-9.3
-7.9
-6.5
0.0
7.4

Shares and other equity
3.5
3.8
2.7
2.3
1.4

Life insurance
2.4
2.2
1.9
1.6
1.2

Pension schemes
2.1
2.0
2.1
2.1
2.1

Financing**
3.6
3.9
4.4
5.3
5.0

Loans
4.0
4.1
4.2
4.3
4.2

Source: ECB.
* Items not shown include: loans granted, prepayments of insurance premiums and reserves for outstanding claims and other accounts receivable.
** Items not shown include: financial derivatives’ net liabilities, pension schemes and other accounts payable.

Data for financial investment and financing of households (Table 1)

Chart 2
Debt ratios of households and non-financial corporations
(percentages of GDP)

Source: ECB and Eurostat.
* Outstanding amount of loans, debt securities, trade credits and pension scheme liabilities.
** Outstanding amount of loans and debt securities, excluding debt positions between non-financial corporations.
*** Outstanding amount of loan liabilities.

Data for debt ratios of households and non-financial corporations (Chart 2)
Non-financial corporations
In the third quarter of 2022, the annual growth of financing of non-financial corporations increased to 3.5% from 3.2% in the previous quarter, reflecting an acceleration in financing by loans as well as shares and other equity, while the financing by trade credits and debt securities decelerated (see Table 2 below).
The acceleration of loan financing was due to higher growth rates in loans from MFIs, from within the non-financial corporations sector, from general government and from the rest of the world, while loans from other financial institutions decelerated (see Table 3.2 in the Annex).
Non-financial corporations’ debt-to-GDP ratio (consolidated measure) decreased to 77.6% in the third quarter of 2022 from 79.4% in the third quarter of 2021; the non-consolidated, wider debt measure, decreased to 140.7% from 142.5% (see Chart 2).

Table 2
Financing and financial investment of non-financial corporations, main items
(annual growth rates)

Financial transactions

2021 Q3
2021 Q4
2022 Q1
2022 Q2
2022 Q3

Financing*
2.3
3.0
3.0
3.2
3.5

Debt securities
2.0
5.6
5.8
4.9
3.2

Loans
3.6
4.4
4.6
5.4
6.3

Shares and other equity
1.1
1.1
1.1
1.1
1.4

Trade credits and advances
6.7
11.1
10.9
11.4
9.4

Financial investment**
4.2
4.9
4.7
4.7
4.7

Currency and deposits
7.0
9.6
8.6
7.9
7.4

Debt securities
-0.2
-5.2
-1.4
4.3
10.3

Loans
6.9
7.2
7.2
6.5
6.2

Shares and other equity
1.2
1.6
2.0
2.4
2.8

Source: ECB.
* Items not shown include: pension schemes, other accounts payable, financial derivative’s net liabilities and deposits.
** Items not shown include: other accounts receivable and prepayments of insurance premiums and reserves for outstanding claims.

Data for financing and financial investment of non-financial corporations (Table 2)
For queries, please use the Statistical information request form.
Notes

These data come from a second release of quarterly euro area sector accounts from the European Central Bank (ECB) and Eurostat, the statistical office of the European Union. This release incorporates revisions and completed data for all sectors compared with the first quarterly release on “Euro area households and non-financial corporations” of 11 January 2023.
The euro area and national financial accounts data of non-financial corporations and households are available in an interactive dashboard.
The debt-to-GDP (or debt-to-income) ratios are calculated as the outstanding amount of debt in the reference quarter divided by the sum of GDP (or income) in the four quarters to the reference quarter. The ratio of non-financial transactions (e.g. savings) as a percentage of income or GDP is calculated as sum of the four quarters to the reference quarter for both numerator and denominator.
The annual growth rate of non-financial transactions and of outstanding assets and liabilities (stocks) is calculated as the percentage change between the value for a given quarter and that value recorded four quarters earlier. The annual growth rates used for financial transactions refer to the total value of transactions during the year in relation to the outstanding stock a year before.
Hyperlinks in the main body of the statistical release lead to data that may change with subsequent releases as a result of revisions. Figures shown in annex tables are a snapshot of the data as at the time of the current release.

Compliments of the European Central Bank.
Footnote:
1. Calculated as loans divided by gross disposable income adjusted for the change in pension entitlements.
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The 2021 surge in global shipping costs was a canary in the coal mine for the persistent rise in inflation

It bears remembering that, as recently as the second half of 2021, the Federal Reserve considered that the surge in consumer price inflation would dissipate, with price increases returning to the Fed’s 2 percent target in 2022. In testimony before Congress, Fed Chair Jerome Powell affixed the now infamous “transitory” moniker to the ongoing price increases, which he ascribed to temporary supply bottlenecks and price declines in the early stages of the pandemic.
The Fed rejected the notion that price increases reflected an overheated economy—a view that was nevertheless already making the rounds in certain segments of Congress—and did not foresee any tightening before 2023 or 2024. New York Federal Reserve Bank President John Williams, who also serves as vice chair of the Fed’s policymaking committee, expected inflation to run at about 2 percent in both 2022 and 2023.
The Fed was not alone in misreading the implications of the data already available in 2021. The IMF, whose mandate is to take an independent view of developments and policies in member countries, described the inflationary surge in a blog by its (then) chief economist, Gita Gopinath, in the same terms as the Fed, pointing to transitory causes and taking comfort in the anchoring of inflation expectations. Like the Fed, the IMF did not mention in its updates the possibility of economic overheating and inflation persistence.
Fast-forward to spring 2022: the IMF’s World Economic Outlook revealed that the institution’s inflation projections were off by a factor of more than 3 for advanced economies and 2 for all other countries. These facts show that the inflation surprise was global.
To be fair, there were factors that were not foreseeable in 2021, such as supply chain disruptions related to China’s zero-COVID policy and commodity price increases owing to Russia’s invasion of Ukraine. There were also factors whose impact was difficult to predict with precision—for example, the unwinding of pandemic-era savings, which boosted demand. Economic forecasters, whether at the Fed or at the IMF, are not geopolitical or public health experts, and often the best they can do is to make an educated guess.
But while policymakers may get a pass for not factoring into their decisions what was unknowable a year ago, they should be held accountable for missing known drivers of inflation, especially those that pointed to enduring price pressures. It’s likely that the Fed has had to hike interest rates further to make up for its delayed start. Recession risks are very plausibly larger as a result, as are the adverse global spillovers from Fed policy.
So was there a smoking gun? In a recent study, my coauthors and I focus on a key driver of global inflation that was very evident already in 2021: the rapid increase in global shipping costs. By October 2021, indicators of the cost of shipping containers by maritime freight had increased by over 600 percent from their pre-pandemic levels, while the cost of shipping bulk commodities by sea had more than tripled.
What caused this remarkable increase? As manufacturing activity picked up following extended COVID-19 lockdowns, demand for shipping intermediate inputs (such as energy and raw materials) by sea increased significantly. At the same time, shipping capacity was severely constrained by logistical hurdles and bottlenecks related to pandemic disruptions and shortages of container equipment. Ports around the world lacked workers, who had to self-isolate after testing positive for COVID-19, and public health restrictions prevented truck drivers and ship crews from crossing borders.
While skyrocketing food and energy prices were making headlines, the surge in shipping costs seemed to pass largely under the radar, despite its potential inflationary impact. Our analysis suggests that a doubling of shipping costs causes inflation to increase by roughly 0.7 percentage point. Given the actual increase in global shipping costs during 2021, we estimate that the impact on inflation in 2022 was more than 2 percentage points—a huge effect that few central banks would dismiss.
Our study also shows that the effect of the shipping cost shock on inflation is longer-lasting than the effects of commodity price shocks, peaking after about a year and lasting up to 18 months. By contrast, the impact of global oil prices on consumer price inflation peaks after only two months.
Of course, this average result varies across economies and regions, and it depends on monetary policy frameworks, particularly central banks’ track record of stabilizing prices and anchoring expectations, as well as on more structural features such as geography (which affects an economy’s remoteness and dependence on goods shipped by sea).
Our evidence suggests that the impacts of surging shipping costs are likely to be larger and more persistent in countries with less-anchored inflation expectations and weaker monetary policy frameworks. Lower-income countries and some emerging market economies may be more at risk than advanced economies with established price stability credentials.

Remote small-island states in the Pacific and the Caribbean are the most affected, according to our study’s results, with an inflationary transmission that is about double the average in the sample as a whole. This amplifies risks of wage-price spirals in such countries (a loop in which inflation leads to higher wage growth, fueling even higher inflation). When shipping costs surge, policymakers everywhere, but especially in such countries, may need to tighten their monetary policy preemptively.
The pandemic spike in shipping costs is more than a year behind us, and our research suggests that we should already have seen most of its inflationary impact by now. Our estimates, moreover, are symmetric, such that declines in shipping costs would tend to bring inflation down in the following year. The implication is for the big moderation in shipping costs in 2022 to contribute to a reversal of inflationary pressures.
Shipping costs’ role as a driver of global inflation is underrecognized. This needs to change. Shipping cost shocks can alert central banks tasked with ensuring price stability of dangers ahead and help them reduce the risk of once again falling behind the curve.
Author:

Jonathan D. Osstry, is professor of the practice of economics at Georgetown University and the former acting director of the IMF’s Asia and Pacific department

Compliments of the IMF.
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