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Sensemaker: The great unequaliser

Sensemaker: The great unequaliser

What just happened

Long stories short

  • Ukraine said its combat mission in Mariupol was over as more than 260 of its wounded fighters were evacuated to Russian-held areas.
  • McDonald’s said it was selling its Russian burger business after 30 years as a symbol of western consumerism in the former Soviet Union (more below). 
  • Foreign secretary Liz Truss will set out the British government’s changes to the post-Brexit trade deal for Northern Ireland.

The great unequaliser

Inflation hits the poorest hardest, and Britain’s central banker says the effect of global food price rises – driven up by war and an energy supply squeeze – could be “apocalyptic”. 

This is not typical language for a governor of the Bank of England. Andrew Bailey’s appearance before MPs yesterday left jaws agape – partly because of his word choice, partly because of the scenario he sketched:

  • Beware the downward spiral. He said rising prices would hit household spending, leading to rising unemployment.
  • The cure hurts too. The standard remedy for inflation – higher interest rates – could be as painful for many households as inflation itself. Two million homeowners in the UK alone saw an immediate increase in mortgage payments when rates rose to 1 per cent last month. At least two more increases are expected this year, but inflation is expected to pass 10 per cent even so. 
  • There’s not much else – far from offering alternative solutions, Bailey said the current inflation picture left him feeling “helpless”.

Others have more ideas.

Larry Summers, the former US treasury secretary, tweeted in favour of higher taxes, not least on billionaires like Jeff Bezos, to tame inflation by limiting demand.

Mohamed El-Erian, chief economic advisor at Allianz and the world’s best-known inflation hawk, has proffered supply-side fixes like replacing fossil fuel dependence with renewables and easing post-Covid supply chain bottlenecks. But he admits these will take time. 

There is a strong argument that Bailey and other central bankers should have done more, sooner to head off the global inflation surge now being exacerbated by unforeseen events. 

“Having initially mischaracterised inflation as ‘transitory’,’’ El-Erian says, “central banks are now playing catchup to contain inflationary expectations.”

But we are where we are and Bailey told MPs angry with his handling of the cost-of-living crisis that criticism of his monetary policy was based on “hindsight”.

This is not entirely true:

  • Prices of energy and tradable goods began rising at the start of 2021, as the world economy rebounded sharply from the Covid pandemic and supply chains could not keep up. The Bank began raising its base rate at the end of the year, when inflation in the UK had already reached a 13-year high.

The real problem for Bailey – and here his “hindsight” argument has some merit – started with a sequence of unexpected supply-side shocks. He was counting on high inflation being transitory until they hit.

  • Russia’s invasion of Ukraine led to a jump in food prices. Together these two countries account for a third of the world’s traded wheat and three-quarters of its sunflower oil. Russia produces enormous amounts of key fertiliser ingredients without which crop yields can tumble.
  • China’s zero-Covid policy has wreaked havoc on supply chains. Trucking within the country is subject to severe restrictions, which means little cargo can get to its international ports. Air cargo is also restricted.
  • A rise in long-term sickness has reduced Britain’s workforce by around 400,000 people. Bailey called this “scale and persistence … very unusual”. It has made the country’s labour market very tight, increasing upward pressure on wages and, in turn, prices.

These shocks, Bailey told MPs, weren’t only unexpected; they came in quick succession. MPs weren’t impressed. The Bank “has one job to do”, one senior minister said: “to keep inflation at around two per cent – and it’s hard to remember the last time it achieved its target.”

But Bailey must also consider what effect a rate rise will have on households. Bank of England data revealed that in September 2021, two months before it began raising rates, around 10 per cent of households reported that loan and interest repayments were a heavy financial burden – a 35 per cent increase on the previous year. That number will only rise this year.

“The major risk now is that of a botched soft landing, and it is a two-sided one,” El-Erian says. “That is, either hitting the policy brakes hard and causing a recession or tapping them too lightly and allowing inflation challenges to persist into 2023.”

Meanwhile, economists are wondering:

  • Is this inflation crisis about demand or supply? Answer: both – demand first, and now supply.
  • Is it a double whammy for consumers? Absolutely. If they borrow as well as eat, the price of everything is going up, including money.

CAPITAL ECONOMY, BUSINESS AND FINANCE

No Big Mac Moscow
McDonald’s, that symbol of American culture and consumerism that opened in Moscow in 1990, has put its Russian business up for sale. The chain employs 62,000 people in Russia and said it would temporarily close its operations there in March, a few weeks after Putin invaded Ukraine. It now hopes to sell its 850 restaurants, some run by franchisees but most of them wholly owned, to a domestic buyer. It expects to lose between $1.2 and $1.4 billion on the transaction. Russians canvassed by the BBC about the proposed sale were broadly relaxed. One said McDonald’s hadn’t done much for people’s nutrition. Another was confident whoever bought the business would fill its niche. History may – or may not – reveal how much such comments are self-censored out of fear of Russia’s resurgent police state. 


CULTURE soCIETY, IDENTITY AND BELONGING

Burkina Faso jihadist raids
Around 40 people have been killed in suspected jihadist attacks in Burkina Faso. Many of the victims were civilian volunteers fighting alongside the army. The attacks occurred at the weekend near Kompienga on Burkina Faso’s southeastern border. The country, one of the world’s poorest, has been destabilised by jihadist raids since 2015, when insurgents began mounting cross-border raids from Mali. An estimated 2,000 people have been killed and two million forced from their homes, many of them then beginning arduous journeys north in hopes of reaching Europe.


TECHNOLOGY AI, SCIENCE AND NEW THINGS

Slow Twitch
Twitch, a video live streaming service, said it managed to take down the live stream of the mass shooting in Buffalo within two minutes of it starting. But two minutes was all it took for the video to be viewed millions of times. This is because it remains easy for viewers to re-upload copies of videos to other platforms. The attack at a supermarket on Saturday evening killed 10 and wounded three people. Eleven were Black. New York authorities are investigating it as a hate crime. In his video rant during the attack, the shooter, an 18-year old white man, said: “Live streaming this attack gives me some motivation in the way that I know that some people will be cheering for me.”


The 100-year life health, education AND GOVERNMENT

North Korean Covid
North Korea’s dictator, Kim Jong Un, ordered his army to improve the distribution of Covid medicine in Pyongyang. His poor and secretive country admitted to its first ever infection last week. Around 1.2 million people are now said to have developed a “fever”, and 50 deaths have been reported. North Koreans are especially vulnerable to the virus because of an acute shortage of vaccinations and a poor healthcare system. Also, they’ve barely been exposed to Covid and so have had no chance of developing natural immunity. South Korea’s offers of vaccines and aid have gone unanswered.


Our planet CLIMATE AND geopolitics

Less lake ice
Shorter, milder winters at mid and high latitudes (i.e. closer to the poles than the equator) are producing thinner “ice lids” on lakes that used to freeze solid, reliably, each year. A new paper in the Journal of Geophysical Research: Biogeosciences says this thinner ice changes the amount of light and oxygen present in the water below, with knock-on effects on biological processes that are so far poorly understood. There are scientific questions to be answered about how thinner ice lids might affect the rivers that drain high-latitude lakes. And there is a burning practical question about the most famous ice lid of all – the one that used to cover Lake Baikal to a depth of several metres. Will trucks still be able to use it as a winter highway? For how long?

Thanks for reading. Please share this around and tell us what we’ve missed. News tips and story ideas are welcome. Email them to sensemaker@tortoisemedia.com.

Paul Caruana Galizia
@pcaruanagalizia

Photographs Getty Images


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