The Russia-Ukraine war is having a rippling effect on the global supply chain, fuelling dramatic cost increases and product shortages around the world.
US markets swung wildly after another hotter-than-expected inflation report cemented expectations for more bumper interest rate increases from the Federal Reserve that some investors worry could destabilize the financial system.
The trigger for the market swings on Thursday was the Consumer Price Index report, which realized investors’ fears about persistent inflation, showing prices rising faster than expected, at an 8.2 percent rate in the year through September.
According to a report of New York Times, the new data is crucial for informing policymakers, and therefore investors, on how much further interest rates will need to rise before inflation starts to consistently fall.
The inflation report has also taken on greater significance as investors grow increasingly worried about the effects of rising interest rates on global financial stability, following further turmoil in British government bond markets this week.
“There are a lot of people out there looking for peak inflation and a slowdown from the Fed on rate hikes, but the data is not in their favor,” said Charlie Ripley, a senior investment strategist at Allianz Investment Management. “This is going to put pressure on the Fed to do more.”
Meanwhile, the British islands are in the midst of recapturing the world’s attention again with the aftermath of their tax and spending plans after the recent funeral of its Queen last month. New Prime Minister Liz Truss and her Finance Minister Chancellor Kwasi Kwarteng took a risky bet by introducing tax cuts, among other spending plans to give the nation’s economy a chance against the Russian-Ukraine war.
The UK saw a massive cost surge as Russia steadily reduced gas supplies through Nord Stream 1 over the last several months. In June, deliveries through the pipeline were cut by 75 percent -- from 170m cubic metres of gas a day to roughly 40m cubic metres -- caused by leaks and shut entirely since late August due to problems with pieces of equipment.
The administration’s new plans could not remedy the effect as expected. As a result, inflation in the UK touched a forty-year high at 9.9 percent, and the energy bill shot up by almost 100 percent, leading the pound to drop 24 percent against the dollar. What started as an energy crisis is now snowballing its way into a debt crisis, bond crisis, housing crisis, currency crisis, and potentially even a banking crisis.
The value of UK government bonds has since largely recovered, but it fell to only $1.03 at one point. The fall in the value of bonds ushers in new higher mortgage repayments reflecting the expectation of higher interest rates and subsequently meant that those who held these assets in big numbers became financially unstable, namely many of the pension funds that have about $1 trillion invested.
The Bank of England had to act quickly, being compelled to avoid a possible financial meltdown by buying these bonds en masse (£65 billion) and reversing its ‘quantitative tightening’ policy recently. By October 3, Prime Minister Truss was propelled to countermand, changing the plans to eliminate the UK’s highest tax bracket.
In the end, even though it might look like a failed home remedy for the British economy, it signals more shortcomings to expect. Experts believe that it may not be a one-off.
John Van Reenen, an Economics Professor from the London School of Economics, wrote on the Harvard Business Review last week, “While the UK’s bad week might look at first like a local affair, it’s symptomatic of a wider set of problems plaguing Europe. For all the faults of the Truss plan — and they are many — the focus on sluggish economic growth is appropriate. But if the UK and the rest of Europe are going to revitalise their economies, they need more than quick fixes. Both the public and the private sector need to commit to investing in productivity-enhancing technologies and in combating climate change.”
The European Commission is scheduled to present its plans to help mitigate energy cost surges in the coming weeks. It will be discussed further in the summit of leaders in Brussels, Belgium on October 20 and 21.