TheChek News Flow

The inflation blame-game will lead to bad outcomes

An absolutist, ‘whatever it takes’ approach was the right call in the financial crisis. It won’t work to rein in current price rises

Rising prices hurt everyone. This makes inflation a political hot button. After downplaying the threat initially, central banks are now in a tough spot.

There is a loud chorus of critics with ex-post claims that the inflation threat was there for everyone to see: if only central banks had raised interest rates earlier, we wouldn’t be in this mess. This is unfair. But rather than pushing back on this simplistic narrative, central banks have resorted to sounding ever tougher on inflation.

There is absolutely an urgent need to raise rates back to a neutral level that neither stimulates nor decreases economic activity. The problem: many central banks are now going further and are pledging to stamp out inflation, “whatever it takes”. That appears to be addressing the current politics of inflation. The actual economics of inflation are not that simple — and call for a more nuanced solution.

Inflation today is the manifestation of a deeper regime shift: the end of the “Great Moderation”, the four-decade-long period of reduced growth and inflation volatility. People have long thought this remarkable feat was the result of good policy. Think of the adoption of effective inflation-targeting frameworks and the unprecedented policy moves to avert a second depression in 2008.

There’s an alternative hypothesis. Perhaps it was just good luck. This is the case academics Jim Stock and Mark Watson made to a policymaker audience in Jackson Hole in 2003. Their work suggested the Great Moderation resulted from an economic environment that yielded a more favourable trade-off between fighting inflation and stabilising output. This was met with scepticism then. It now has become clear good luck was a big factor.

From the 1980s until 2020, we were in a demand-driven economy with steadily growing supply. Exuberance and borrowing binges drove overheating, while souring sentiment and collapsing spending drove recessions. Central banks could mitigate both by either raising or cutting rates.

The last two years have been very different. Production constraints have been hampering the economy in ways they never did during the Great Moderation. The pandemic triggered the largest — and still unresolved — spending shift recorded in the US, from services to goods. The most important bottleneck to ramping up production has been labour supply: many people are hesitant to re-enter the labour market or are taking longer to find a job in a new sector. And these production constraints have been exacerbated by large energy and food price shocks resulting from the Ukraine war.

Even when the constraints do resolve, structural trends such as geopolitical fragmentation, the rewiring of globalisation and the climate transition will affect production and push costs up for years to come.

It is possible to bring inflation back to 2 per cent quickly. But this will come at a great cost. Raising interest rates will do nothing to relax these production constraints, reduce energy prices or address the root cause of this inflation. The only way to bring inflation down is to crush the interest-rate sensitive parts of the economy that are not responsible for today’s inflation. This is a far cry from the demand-driven episodes of the last 40 years, when raising interest rates was the remedy for debt-driven spending.

That trade-off is even more complicated given the real risk that inflation becomes entrenched via higher inflation expectations. The only way to deal with that risk? Explain the situation as it is: clearly articulate the very unusual nature of today’s inflation and the stark trade-off it entails. This would help keep inflation expectations anchored. The alternative is damaged credibility for central banks and even more rate hikes.

The bottom line is that the inflation blame-game misses the intricacy of the challenge. An absolutist, “whatever it takes” approach was the right call to stem the financial crisis. It won’t work to rein in today’s inflation.

We are facing the starkest trade-off between inflation and growth since the early 1980s. Central banks will have to crush the economy to kill inflation. Or we might be forced to live with more inflation. This is not a trivial choice. Either way, we are on course for a less favourable combination of inflation and growth. Blindly pursuing the politics of inflation is almost certain to lead to even worse outcomes. A clear and nuanced framing of the issue is difficult to achieve in today’s hyper-politicised environment, but it’s what we badly need.

KKR and Macquarie walk away after Li Ka-shing group decided inflation had increased the electricity distributor’s value

The £15bn takeover of Britain’s largest electricity distributor by a consortium led by KKR and Australia’s Macquarie has collapsed after rising inflation prompted a last-minute price rise by its Hong Kong owner.

Billionaire tycoon Li Ka-shing’s CK Infrastructure Holdings, which bought UK Power Networks for £5.5bn in 2010, tried to increase the sale price just two days before an agreement was due to be signed last month, according to two people close to the deal.

The six-member consortium decided the asking price was too high and pulled out of the discussions.

CKI’s decision was the result of the sharp rise in UK inflation, the people said, with currency movements also a factor. UK inflation is currently running at 9.1 per cent, its highest level since the early 1980s.

“It was unusual for the price to be changed at such short notice and after a year of due diligence,” said one person close to the bidders. “The price expectations from the seller massively changed so we exercised cost discipline and walked away.”

Privatised infrastructure assets in the UK — including the electricity, gas and water networks — benefit from rising inflation because their returns are set by the regulator and linked to either the CPI or RPI index. The benefits generally outweigh the costs associated with rising inflation, such as staff, maintenance and materials, as the businesses are not labour-intensive.

Colm Gibson, managing director of Berkeley Research Group, said interest in UK infrastructure assets was likely to remain strong despite UK government threats to impose windfall taxes on parts of the sector such as oil and gas companies and electricity generators.

“Because utilities’ asset values and revenue streams are both indexed to inflation and backed by regulatory guarantees, these industries are regarded as safe havens by investors”, he said. “This is particularly true given the current inflation outlook.”

UK Power Networks is the largest electricity distribution network operator in the UK, transmitting to 8.3mn homes and businesses in the south-east and East Anglia, and earning about a quarter of all revenues in the sector.

The company came under pressure after thousands of customers were left without power during storms in recent months. It is one of six monopoly network companies that operate Britain’s pipes and wires, and derive all their revenues from customer bills, which are soaring as a result of higher gas prices linked to Russia’s invasion of Ukraine.

The cost of the electricity and gas transmission and distribution networks accounts for about a fifth of customer bills, according to Ofgem.

The botched sale took place amid talks between Ofgem and the UK electricity distribution network operators, including UKPN, over how much they will be allowed to charge customers for the five years starting in 2023. Although the regulator has pledged to crack down on profits, experts said this would not have affected either the buyers’ or vendor’s attitude towards the deal.

Appetite for UK infrastructure assets has remained strong because the sector proved resilient to the pandemic at a time when industries such as leisure and retail suffered.

ional Grid agreed last year to buy PPL Corp’s UK electricity distribution business for £7.8bn, while Macquarie bought a majority stake in Southern Water, one of the largest water monopolies, for £1bn.

A consortium led by Macquarie also bought a 60 per cent stake this year in National Grid’s UK gas transmission business.

In the year to March 31 2021, UK Power Networks delivered a pre-tax profit of £614.8mn on revenues of £1.76bn, while paying out £237mn in dividends as well as £76.9mn in interest on shareholder loans. Li Ka-shing’s empire bought UK Power Networks from France’s EDF in 2010.

Macquarie and KKR declined to comment. CKI did not respond to requests for comment.

Central bank cites urgent need to harmonise different rules before EU-wide agreement becomes law

The European Central Bank will this week warn eurozone countries of the dangers of national regulators getting ahead of pending EU cryptocurrency rules, highlighting the difficulties of introducing efficient oversight of the rapidly evolving “wild west” sector.

The European Commission last week agreed a sweeping package of standards for the crypto industry. But the central bank is concerned about a messy patchwork of national regulations governing the overlap between banks and crypto companies before the package’s full implementation 18 months after it is set to become law next year.

It will raise the urgent need for “harmonisation” at a meeting of its supervisory board on Tuesday, people familiar with the discussions said.

“It’s very challenging,” said a national regulator in one eurozone country. “With Mica [the EU’s digital regulation package] 18 months away, are you better to say, ‘until it’s in, do what you like, there’s no regulation’ or are you better to try to get a handle on it?”

Germany has been the most proactive in its efforts to tame digital currencies. It used the EU’s 2020 anti-money laundering directive to require companies that hold and facilitate trading of crypto assets on behalf of clients to apply for special licences under German banking law.

Other eurozone countries such as the Netherlands initially focused their efforts on registrations for anti-money laundering compliance, but several have been considering broader measures after Russia’s invasion of Ukraine highlighted the potential for crypto to be used for illicit means such as evading sanctions. Concerns over consumer protection have also increased as the value of bitcoin, the biggest cryptocurrency, has plunged more than 70 per cent from its peak.

Another country-level regulator said national authorities “that are pressed by their industry need to come up with answers”. Some banks have been clamouring for clarity on which activities they can safely pursue, while some crypto companies have pushed for regulation to boost their sector’s credibility, though others have argued for a lighter touch.

The ECB has concerns about potentially adjudicating on crypto-related licences pursued by banks when there is no pan-European framework in place, one person familiar with the matter said. It will discuss that issue — and the broader need for harmonisation of eurozone approaches — with regulators from its 19 member states at tomorrow’s supervisory board meeting.

Andrea Enria, chair of the ECB’s banking supervisory board, last week told MEPs in Brussels that the central bank was seeing “differences in national regimes around crypto” and that a level playing field “would be important”. He said it would be “focusing on internal principles to ensure you have a smooth authorisation [and] licensing process for banks engaging in these areas”.

The intervention may face resistance from countries that want to go further on their own, but some are likely to support the ECB’s effort. “There is clearly an issue of both harmonisation and timing; the full application of Mica will take quite some time, so it is important to act soon,” said a person familiar with discussions at a third national supervisor.

Germany’s BaFin watchdog said its regime was “broadly equivalent” with the planned Mica legislation. It has granted four licences so far, to fintechs Coinbase Germany, Kapilendo Custodian, Tangany and Upvest and none to traditional banks, which would also need a licence if they were to expand into crypto custody.

More than 20 licence applications were under review, BaFin added, while some had been turned down because applicants could not meet the watchdog’s requirements, which cover aspects such as internal controls and IT platforms to anti-money laundering checks.

A lawyer said it was “not uncommon” for Germany to be an early mover on regulation, “especially where there are consumer issues”. The ECB declined to comment on what would be discussed at the supervisory board meeting.

The houses join France's luxury association alongside Chanel, Christian Dior and Perrier-Jouët.

SOLE MATES: Christian Louboutin and LVMH Moët Hennessy Louis Vuitton’s Champagne house Maison Ruinart have joined France’s Comité Colbert as the newest members.

The committee, which promotes luxury, was started in 1954 by Jean-Jacques Guerlain of the famed fragrance family, and is made up of 81 members.

Their candidacies were affirmed by a general assembly vote June 14.

“We are very proud and very happy to join the Colbert Committee and its members. We share the same values and, as an independent house, we hope to make our contribution to all the subjects dealt with by the committee, in particular on sustainable development and intellectual property. We also hope to contribute to the influence of French luxury abroad,” said Christian Louboutin chair Alexis Mourot.

“We are pleased to join the Maisons d’excellence that make up the Comité Colbert, and to help define together a vision for the future of the luxury industry. This affirms our belief that collective intelligence allows us to face the challenges of tomorrow with greater strength and creativity,” added Maison Ruinart chief executive officer Frédéric Dufour.

“The arrival of these new prestigious members in the Comité Colbert is a sign of the attractiveness of our association, the relevance of its actions and its influence,” said Comité Colbert CEO Bénédicte Epinay. “Welcoming an old house like Ruinart and more recent creation like Christian Louboutin testifies to the dynamism and creativity constantly renewed of our collective.”

The organization’s objective is to promote luxury, preserve the ancestral know-how of its houses, to work on legislative and regulatory issues and to anticipate future challenges in the sector.

To that end, the committee commissioned a report examining the luxury industry as it recovers post-pandemic, and to look at future challenges. It covered topics as diverse as sustainability, globalization and the metaverse, and found that the sector has returned to 2019 levels and will continue its growth, topping $517 billion in 2026.

The committee includes luxury labels from several sectors including haute couture and fashion, fragrance and cosmetics, hospitality and wine and spirits. Other members include Chanel, Christian Dior and Louis Vuitton, as well as Champagne houses Charles Heidsieck, Krug and Perrier-Jouët.

IEA: Global Nuclear Capacity Needs To Double To Meet Net-Zero Goals

Landmark case signals shift for consumers towards mass lawsuits over antitrust breaches

Millions of UK consumers are currently embroiled in Britain’s biggest ever “class action” lawsuit — even if they don’t yet realise it.

Walter Merricks, the former financial ombudsman, is representing 46.2mn people in a £10bn lawsuit against payments company Mastercard, a case that is testing new ground in the English legal system.

Merricks claims that Mastercard infringed EU competition law by imposing unfair fees — known as “interchange fees” — on customers between May 1992 and June 2008 for the use of debit and credit cards. Mastercard contests the lawsuit, saying it is “confident that once the facts are presented in court, it will be thrown out”.

The action has paved the way for a British wave of US-style class actions — antitrust lawsuits filed on behalf of millions of consumers — against large companies such as BT, Apple and Qualcomm.

In 2015, the UK passed the Consumer Rights Act allowing for the first time collective suits on behalf of consumers and businesses over breaches of competition law. However, the legislation only gained momentum in the wake of a landmark Supreme Court ruling in late 2020 allowing Merricks’ case to proceed.

These types of lawsuits involve large numbers of consumers due to an “opt-out” clause, which means those who are potentially affected are automatically included unless they choose to “opt out.” As a result, many consumers have no inkling they are part of a lawsuit, say solicitors.

The flood of recent such cases in the UK has been underpinned by cash-rich litigation funders keen to deploy their capital by backing collective lawsuits. A recent study by law firm RPC found litigation funders had a £2.2bn “war chest” of capital to use.

“Class actions can bring big rewards for litigation funders,” said Chris Ross, partner at RPC. “They allow a funder to deploy a lot of capital at once as they are expensive cases to run, but they can also be efficient investment vehicles, because each class action can attract hundreds or thousands of claimants.”

“There has been an explosion of interest in this area over the past few years and this allows people to assert their rights,” said David Greene, senior partner at law firm Edwin Coe, who specialises in competition and shareholder claims, and who is also co-president of the Collective Redress Lawyers Association.

Since the 2015 legislation, seven class action lawsuits have been allowed to proceed to trial, including a case on Friday, with at least a dozen more waiting approval. To proceed to trial, cases must first be heard and certified in the Competition Appeal Tribunal.

Large technology companies are fast becoming the targets of such class actions. The latest to be filed is a £768mn lawsuit, led by market researcher Justin Gutmann on behalf of 25mn UK iPhone users against Apple and which has yet to be certified; it claims the tech giant misled customers by allegedly concealing a tool in software updates that slowed their devices.

Apple said: “We have never — and would never — do anything to intentionally shorten the life of any Apple product, or degrade the user experience to drive customer upgrades.”

In another case, Which?, the Consumers’ Association, has brought a £480mn lawsuit against Qualcomm, the US chip supplier, on behalf of 29mn owners of Apple and Samsung phones. If successful at trial, it could see customers receive an estimated £5 and £30 each.

The case alleges the company abused its dominant position in relation to the royalties charged to smartphone manufacturers for the licensing of its patents for chipsets.

Qualcomm said the claims “have no merit and rehash old allegations from a lawsuit brought by the Federal Trade Commission in the US — a lawsuit that Qualcomm won”.

Class actions are also being used to challenge the telecoms sector. BT is currently involved in an estimated £600mn class lawsuit spearheaded by Justin Le Patourel, a telecoms expert, on behalf of approximately 2.3mn BT landline customers.

The case centres on BT’s alleged abuse of its dominant position and could see consumers receive £200 to £500 each if successful. BT said: “We strongly disagree with the speculative claim being brought against us.”

Le Patourel believes the new legal regime is a vital tool to help consumers: “The opt-in regime is good . . . because many people don’t want to put their head above the parapet and would be reluctant to sign up to a legal case if they don’t know what it involves.”

Kate Pollock, partner and head of competition litigation at Stewarts Law, agrees that these collective actions are “one of the most active areas of litigation at the moment”.

However, lawyers say the new regime ushered in by the 2015 Consumer Rights Act has plenty of practical hurdles. Some question, for example, how easy it is to track down millions of customers who might be owed a few hundred pounds of compensation.

But many believe the legislation is now starting to deliver the change promised. “It has been helpful in allowing consumers and small businesses . . . to assert their rights,” said Luke Streatfeild, partner at law firm Hausfeld.

“It also creates a deterrent for businesses to engage in anti-competitive behaviour.”

Scientists across the world flagged the emergence of a new coronavirus variant in India, the BA.2.75; May have increased ability to infect people who have been infected before, as well as those who are vaccinated

- Scientists across the world have flagged the emergence of a new coronavirus variant in India, the BA.2.75, which is said to be cropping up increasingly in samples, and may have an increased ability to infect people who have been infected before, as well as those who are vaccinated.

- BA.2.75 is a sub-lineage of the Omicron variant. Sub-lineages of Omicron have become the dominant variants circulating across the globe, with new mutations continuously evolving.

- At least 23 samples of the BA.2.75 variant have been detected in India so far, in Maharashtra, Karnataka and Jammu & Kashmir, according to the data uploaded on Nextstrain, an open-source platform of genomic data.

- Worldwide, just about 37 samples of the variant have been detected, including in Australia, Germany, Canada and New Zealand, according to the Nextstrain data.

- There has been no official communication about the variant from the Indian government, or the Indian SARS-CoV-2 Genomics Consortium (INSACOG), a genomic surveillance agency functioning under the health ministry. However, independent scientists from many parts of the world have flagged BA.2.75 on various online platforms, pointing out that the accumulation of different mutations on the spike protein of this variant is a cause for concern.

- The BA.2.75 variant includes new mutations in the spike protein, in addition to the mutations that are already present in the Omicron variant, explained the Indian genomic scientist quoted earlier. Spike proteins are the protrusions seen on the outer surface of the novel coronavirus.

- Of particular concern, said the scientist, are the mutations ‘G446S’ and ‘R493Q’, both of which are associated with significant changes in the protein structure of the spike protein, with the potential to give the variant the ability to evade several antibodies.

- As a result, the variant is expected to infect people who have been vaccinated, or have been infected previously.

- However, currently, there is a lack of data on how fast the infection from this particular variant is spreading, owing to insufficient surveillance. There is also not enough data currently to ascertain if the variant has the potential to cause severe infection.