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New data show Fed’s inflation debate still unresolved

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October 29, 2021

By Howard Schneider

WASHINGTON (Reuters) – Federal Reserve Chair Jerome Powell, in a high-profile speech in August, outlined the arguments for why the current bout of high U.S. inflation will be “transitory,” and moderate on its own over time.

New data released on Friday show the jury is still out, with the personal consumption expenditures price index rising in September at a 4.4% annual rate versus 4.2% in August, continuing a run of inflation at levels not seen in 30 years.

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Excluding food and energy costs, the index rose at a 3.6% annual rate in September, matching the rise in the prior three months and a sign that price increases continue even when some of the more volatile items are excluded.

Cornerstone Macro economist Nancy Lazar said in a webinar that she still expects Powell to be right. Consumers splurged on goods during the coronavirus pandemic. But demand for things like furniture and computers is now declining, and for many products “we think deflation is the word” for the coming year, with price declines for goods offsetting price increases for services and tempering inflation overall, she said.

Still, employment costs, noted by Powell as something to watch closely, rose in the third quarter at the highest rate since 2001.

“The inflation debate is going to shift to wages very, very quickly,” Lazar said, and whether increases in productivity and an increase in the number of people looking for work help ease rising compensation costs or temper their potential impact on prices.

The U.S. central bank meets next week to update its views about monetary policy, as officials balance their hope to support the economy with low interest rates for as long as possible against concerns inflation may be moving too fast.

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Here’s how the inflation story has evolved:

HIGHER PRICES AHEAD

Fed officials knew early this year that inflation would rise as the global economy rebounded from the pandemic. But where some economists felt record levels of federal spending would produce persistent price increases, most Fed officials expected a fleeting episode driven at first by simple math – the “base effects” of a weak economy returning to normal – along with some inevitable bumps in the reopening.

At their March 16-17 policy meeting, Fed officials marked up their inflation outlook for 2021. Powell, speaking in a news conference after the release of the policy statement and economic projections, said those “relatively modest increases in inflation … will turn out to be a one-time sort of bulge … There was a time when inflation went up, it would stay up. And that time is not now.”

By September, however, inflation was running at twice the Fed’s 2% target, and officials’ projections moved higher.

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(GRAPHIC: The Fed’s inflation outlook – https://graphics.reuters.com/USA-FED/INFLATION/gkvlgxyqnpb/chart.png)

Powell’s own language shifted. “As the reopening continues, bottlenecks, hiring difficulties, and other constraints could again prove to be greater and longer lasting than anticipated, posing upside risks to inflation,” he told reporters after the end of the central bank’s Sept. 21-22 policy meeting.

(GRAPHIC: The COVID inflation surge – https://graphics.reuters.com/USA-FED/INFLATION/akvezawxopr/chart.png)

Some policymakers have pinpointed the end of the year as the moment when inflation needs to ease, or they’ll worry they got it wrong.

Powell and many others still think that will happen, but on a longer timetable than first anticipated, with September data showing little evidence of the expected slowdown.

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BROAD-BASED INCREASES?

“The spike in inflation is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy,” Powell said in his August remarks.

He cited the fact that alternate inflation measures which toss out the strongest price influences remained moderate. But those measures have moved higher since he spoke, reflecting broader price increases.

(GRAPHIC: Broad based inflation – https://graphics.reuters.com/USA-FED/INFLATION/klpykzrowpg/chart.png)

WANING INFLUENCE OF OUTLIERS

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Policymakers, Powell said, are also “directly monitoring the prices of particular goods and services most affected by the pandemic and the reopening, and are beginning to see a moderation in some cases.”

Powell cited the well-known example of used autos. Used vehicle prices rose at a record pace over the summer, and that has in fact eased. But he also mentioned that price hikes for durable goods in general should moderate, and by some measures that has not yet happened. Inflation for durable goods rose 7.3% in September on an annual basis, versus 7% in August.

(GRAPHIC: Pressure off the top? – https://graphics.reuters.com/USA-FED/INFLATION/klvykzrrwvg/chart.png)

WAGES

“Today we see little evidence of wage increases that might threaten excessive inflation,” Powell said in August. “We will continue to monitor this carefully.”

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The costs of compensation jumped 1.3% for the three months ending in September, the largest increase since 2001, leaving the Fed to assess whether the adjustment of labor supply and demand is near its end, or only beginning. Compensation costs for the hard-hit food and accommodations industry rose more than 7% on an annual basis.

(GRAPHIC: Wage and benefit costs – https://graphics.reuters.com/USA-FED/INFLATION/zdvxorebnpx/chart.png)

EXPECTATIONS

“Longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory,” Powell said.An argument can be made that the Fed is paying more attention to expectations than inflation itself, though measurement of them is less certain. They have been drifting higher, and if that continues it would be of particular concern.

(GRAPHIC: Inflation expectations ratchet higher – https://graphics.reuters.com/USA-FED/INFLATION/gdvzywakwpw/chart.png)

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‘GLOBAL DISINFLATIONARY FACTORS’

Perhaps the most faith-based aspect of Powell’s August speech was his reference to the global influence of technology, demographics, and smooth world supply chains in anchoring prices.

(GRAPHIC: Global disinflation – https://graphics.reuters.com/USA-FED/INFLATION/xmvjolddxpr/chart.png)

“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”The truth of that will depend on developments far outside the Fed’s control, from the global flow of capital to China, for example, as the rule of Chinese leader Xi Jinping evolves, to the impact of climate change mitigation efforts that are still in their infancy.

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)

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Volkswagen exploring IPO of luxury carmaker Porsche -sources

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December 7, 2021

BERLIN/HAMBURG (Reuters) -Volkswagen is still exploring a possible initial public offering of its luxury brand Porsche AG as a way to fund its costly shift towards software and electric vehicles, two people familiar with the matter told Reuters on Tuesday.

Speculation about a Porsche listing, which could be a record-breaking IPO, has surfaced over the year, but no decision has been made due to a complex stakeholder set-up, the sources said, adding it was unclear whether a listing would happen.

Reports about a possible listing of the unit have included estimates of a standalone Porsche AG valuation of between 45 billion and 90 billion euros ($101 billion).

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Earlier, Handelsblatt reported that the Porsche and Piech families, who control Volkswagen’s largest shareholder Porsche SE, are considering selling part of their VW stake to fund a substantial stake purchase in a possible Porsche IPO.

The families, who own 31.4% of Volkswagen shares and have 53.3% of voting rights via Porsche SE, could sell enough shares to raise roughly 15 billion euros, the German newspaper said.

They would remain the largest shareholder in Volkswagen, Handelsblatt added, ahead of the state of Lower Saxony, which holds a 11.8% equity stake and 20% of voting rights.

Porsche SE called the report “pure speculation”, without giving further comment. Volkswagen declined to comment.

Volkswagen preference shares, which have fallen significantly in recent weeks due to a leadership tussle, closed up 8.6% at the top of Germany’s benchmark DAX index.

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Porsche SE shares closed 8.5% higher.

People familiar with the matter told Reuters in May that the families were prepared to take a direct stake in Porsche https://www.reuters.com/business/finance/porsche-piech-families-weigh-direct-stake-possible-porsche-ipo-sources-2021-05-31 AG should the luxury carmaker be separately listed.

Such a move would loosen the grip of the families on Europe’s largest carmaker Volkswagen, in favour of direct ownership of the sports car brand founded by their ancestor Ferdinand Porsche, which dates back to 1931.

Asked about a potential listing of Porsche in October, Chief Executive Herbert Diess said that Volkswagen was constantly reviewing its portfolio, but gave no further comment.

Diess will probably stay on as VW CEO although he will cede some responsibilities after a clash with labour leaders, two sources familiar with the matter told Reuters.

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($1 = 0.8894 euros)

(Reporting by Victoria Waldersee, Ilona Wissenbach, Jan Schwartz, Pamela Barbaglia and Christoph Steitz; Editing by Madeline Chambers and Alexander Smith)

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American Airlines taps president Isom as next CEO

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December 7, 2021

By Rajesh Kumar Singh and Abhijith Ganapavaram

(Reuters) – American Airlines Group Inc CEO Doug Parker will hand over the reins of the No. 1 U.S. airline to president Robert Isom on March 31, the company said on Tuesday, sending its shares up 2% in morning trade.

Parker will continue as chairman, while Isom will join the carrier’s board after he takes over as CEO.

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Isom, a longtime airline industry executive, took over as president in 2016 and has overseen operations, planning, marketing and pricing.

The leadership change comes as the industry recovers from the lows hit during the pandemic but faces operational challenges due to the threat posed by the Omicron coronavirus variant.

Isom faces the challenge of repairing American’s balance sheet as the pandemic has left it with the largest debt stock in the U.S. airline industry. He will also have to work on improving relations with the company’s labor unions.

In an interview, Isom said American would focus on returning to profitability as soon as possible and delivering a reliable service. He also aims to pay down a lot of debt.

“We’re going to be really focused on making sure that we have an appropriate level of leverage,” Isom told Reuters.

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Returning to profitability, however, is contingent upon a full recovery in travel demand. Isom said while the airline’s domestic business remained strong, new travel restrictions following the Omicron variant’s discovery had dampened demand in some international markets.

“If there’s anything, it just delays recovery,” he said.

Isom, 58, has been playing a key role in developing American’s strategy before and through the pandemic.

Analysts at Jefferies said he would bring broad experience to the job and the leadership change was unlikely to result in a deviation from the strategy, focused on fleet renewal and alliances, under Parker.

“Given Mr. Isom’s lengthy history with Mr. Parker, this transition was likely in place for a significant period of time,” they wrote in a note.

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A ‘THOUGHTFUL AND WELL-PLANNED’ SUCCESSION

In a letter to employees, Parker said the transition was the result of a “thoughtful and well-planned multi-year process”, dating back to Isom’s elevation to president in 2016.

Parker, 60, said the transition would have happened sooner if it was not for the pandemic, which brought the airline industry to its knees.

“While we still have work to do, the recovery from the pandemic is underway and now is the right time to make the transition,” he said.

Parker, one of the longest-serving chief executives in the airline industry, is known for overseeing consolidation in the industry as well as leading it through crises.

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He took the reins at America West Airlines just 10 days before the 9/11 attacks. When America West merged with US Airways in 2005, Parker continued as CEO of the combined company.

He was named chairman and CEO of American Airlines in 2013 after its merger with US Airways.

He was also instrumental in negotiating a COVID-19 relief package for the industry, which carriers say has saved thousands of jobs, prevented bankruptcy and put it in a position to support the economy’s recovery from the pandemic.

Under Parker, American expanded overseas and took on low-cost carriers at home, sparking a fare war. He formed strategic partnerships with Alaska Airlines and JetBlue Airways Corp to compete in markets where other carriers had an advantage.

The alliance with JetBlue, however, has invited lawsuits from the U.S. Justice Department and six states.

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In June, Southwest Airlines Co named company veteran Robert Jordan as CEO in place of Gary Kelly, who will step down next year.

(Reporting by Rajesh Kumar Singh in Chicago and Abhijith Ganapavaram in Bengaluru Editing by Arun Koyyur, Jason Neely and Mark Potter)

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U.S. bank executives worried about sustained high inflation

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on

December 7, 2021

By Matt Scuffham

NEW YORK (Reuters) -U.S. bank executives on Tuesday raised concerns about the impact of a sustained period of higher inflation, adding to pressure on the Federal Reserve to accelerate plans to wind down the pace of its asset purchases.

Senior bankers are increasingly concerned that higher inflation could impact borrowers’ ability to pay back loans, slow U.S. economic growth and destabilize stock markets.

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Wells Fargo Chief Executive Charlie Scharf said at a conference that the U.S. central bank may need to move quicker to address inflation concerns. Goldman Sachs CEO David Solomon said he anticipated a period of higher inflation.

Bank of America CEO Brian Moynihan said his bank was running internal health checks to ensure its portfolios could withstand a return to 1970s-style inflation.

“We’ve been doing that for three or four quarters now figuring that we’d be at this place where inflation is real and out there,” Moynihan said at the Goldman Sachs Financial Services Conference.

Annual U.S. inflation increased from 1.4% to 13.3% from 1960 to 1979, while the country’s economic growth stagnated.

That had a marked impact on people’s lives, with the value of savings and the purchasing power of fixed incomes like pensions being undermined.

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U.S. inflation is running at more than twice the Fed’s flexible 2% annual target.

The International Monetary Fund last week warned of intensifying inflationary pressures, especially in the United States, and said U.S. central bankers should focus more on inflation risks.

“There’s a case to be made that they (the Federal Reserve) should be moving faster than they’ve been moving,” Scharf said.

“Inflation is very, very real,” he said. “Prices are significantly higher for inputs across most industries. Labor shortages and wage increases are extremely real. Whether that continues for several years is not all that relevant, but it certainly will have an impact over the next year or so.”

PANDEMIC’S SHADOW

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The U.S. central bank needs to be ready to respond to the possibility that inflation may not recede in the second half of next year as most forecasters currently expect, Fed Chair Jerome Powell said last week.

“My guess is now that there will be a quicker path to appropriate actions,” Scharf said.

Goldman Sachs’ Solomon anticipates inflation will be higher for a period but doesn’t expect a repeat of the cost rises of the 1970s, he said in an interview with CNBC.

“There’s a reasonable chance that we’re going to have inflation above trend for a period of time, but that doesn’t mean it has to be like the 1970s,” he said. “You’ve got to be cautious and manage your risk appropriately.”

Solomon acknowledged “uncertainty” in global financial markets due to factors including the emergence of the Omicron COVID-19 variant and question marks over the pace at which the Fed and other central banks will reduce asset purchases.

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The Fed has begun reducing its $120 billion in monthly purchases of Treasuries and mortgage-backed securities on a pace that would put it on track to complete the wind-down in mid-2022. There is growing pressure on the central bank to accelerate the end of the bond-buying program, which was unveiled in 2020 to stem the economic fallout from the pandemic.

“We’re still not completely out of the pandemic. There’s uncertainty that comes from that and that uncertainty is going to affect economic activity,” Solomon said.

“On top of that, we have shifts going on in fiscal and monetary policy to try to balance that. There’s no question that this has been an unprecedented period, so it’s very hard to predict how we’re going to come out of this.”

(Reporting by Matt Scuffham, Editing by Louise Heavens, Emelia Sithole-Matarise and Paul Simao)

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