Economists Warn a ‘Summer of Fun’ Could Lead to Autumn Pain

Global NewsXJune 23, 2023Last Updated: June 23, 2023

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Economists Warn a ‘Summer of Fun’ Could Lead to Autumn Pain

‘Fun-flation’

Uncomfortably high inflation appears set to linger, forcing central bankers to inflict further pain on consumers and businesses by raising borrowing costs again and again.

But economists have spotted an unusual trend heading into the summer: Consumers are still splashing out on expensive but fun experiences, from nights out to concerts, despite surging prices.

Central bank chiefs on both sides of the Atlantic are sounding the alarm. The Bank of England raised interest rates by a higher-than-expected half-percentage point after failing to get a handle on the highest inflation of any Group of 7 country. The bank’s governor, Andrew Bailey, whose credibility is taking a pummeling, gave a cautionary explanation: “If we don’t raise rates now, it could be worse later.”

Hours later, Jay Powell, the Fed chair, told a Senate committee that he saw a similar threat. “We are committed to getting inflation under control,” he said, warning that at least one more increase is on the table.

Economists are seeing something weird in the inflation data. Consumers are splurging on pricey meals, through-the-roof airfare and expensive concert tickets. Some economists in Sweden even blamed Beyoncé fans for driving up prices of hotels and restaurants when they converged on the country last month to see the star kick off her world tour. In the U.S., others have seen a similar effect with hotel prices soaring in cities where Taylor Swift performs.

“It’s fun-flation, if you’re looking for a word,” Holger Schmieding, chief economist at Berenberg, told DealBook. And the data suggests this brand of inflation isn’t receding. “We’re looking at the summer of fun,” he said.

When inflation runs persistently high, consumers normally cut back. If they do spend, it is typically on so-called durable goods: a new washing machine, a car, a house. The thinking is that it’s prudent to bring forward such purchases if you believe you’ll spend more for them in the near future. Economists and central bankers are seeing a bit of that, but also higher spending on discretionary items, such as travel and nights out.

Some call the phenomenon “revenge spending,” the zeal to indulge in experiences now that Covid lockdowns are far in the past. (It helps that many still have pandemic savings to draw on, or have seen their wages surge in the past year.) Grant Fitzner, the chief economist of Britain’s Office for National Statistics, has singled out airfare, concert tickets and computer games as big drivers behind the country’s stubbornly high inflation.

A summer of fun could invite a tougher policy response this autumn. “The only way to get inflation down to 2 percent is to crush demand and slow down the economy in a more substantial way,” Torsten Slok, chief economist at Apollo Global Management, told The Financial Times.

HERE’S WHAT’S HAPPENING

The five people on the Titan submersible are presumed dead. U.S. Coast Guard officials said that the vessel appeared to have suffered a “catastrophic implosion” near the site of the Titanic wreck. Deep-sea experts, including the director James Cameron, said the company had long been warned of flaws in the Titan’s design.

Microsoft warns it may abandon its takeover bid for Activision Blizzard. Lawyers for the tech giant said at a court hearing that it would walk away from the $70 billion deal if a federal judge granted the F.T.C. an injunction that delayed the transaction’s closing. Microsoft’s team also accused Sony, a top video game rival, of being the “complainer in chief” about the deal.

TikTok shakes up its leadership. V. Pappas, its chief operating officer, will leave the video app maker, and it named Zenia Mucha, the combative former head of media relations at Disney, as its communications chief. The moves come as TikTok faces pressure from Washington over its parent company ByteDance of China and questions about its data and privacy practices.

Warren Buffett gives billions more to charity. The Oracle of Omaha donated $4.6 billion worth of his Berkshire Hathaway holdings to five groups, including the Gates Foundation and organizations run by his children. That brings Buffett’s total charitable giving to more than $51 billion — more than his entire net worth in 2006, when he first began his huge annual donations.

India reaps a trove of deals from Modi’s U.S. visit

During his state visit to Washington this week, Prime Minister Narendra Modi of India has secured a wealth of deals, and praise, from President Biden, including long-sought defense pacts and pledges on economic cooperation.

Modi benefited from Biden’s effort to tighten ties with India, a bid to make it a counterweight to China and erode its alliance with Russia. But all the deals and pomp of the visit — including an address to Congress and a lavish state dinner — may not have accomplished what the White House had wanted.

Among the deals that India got: a long-delayed purchase of $3 billion worth of Predator drones; a joint venture with General Electric to produce next-generation jet engines in India; pledges by chipmakers including Micron and Applied Materials to invest in plants there; and other initiatives on telecommunications, artificial intelligence and more.

Unexpectedly, the U.S. and India also resolved six disputes before the World Trade Organization, with Modi agreeing to lift retaliatory tariffs on a range of American exports.

U.S. leaders gave Modi a hearty welcome, as Washington seeks to nudge India further into the American sphere of influence. “The partnership is among the most consequential in the world,” Biden said at a news conference on Thursday.

Corporate America was highly involved in the visit, as businesses seek to make further inroads into India as a key manufacturing hub and growing market. Consider who dined on stuffed portobello mushrooms and saffron-infused risotto with Modi at last night’s state dinner:

Industrial chieftains like Dave Calhoun of Boeing, Larry Culp of G.E. and James Taiclet of Lockheed Martin;
Tech giants including Sam Altman of OpenAI, Tim Cook of Apple, Sanjay Mehrotra of Micron, Sundar Pichai of Alphabet and Lisa Su of A.M.D.;
Financial leaders like Ken Chenault, Jane Fraser of Citigroup, Adena Friedman of Nasdaq, Deven Parekh of Insight Venture Partners and Hemant Taneja of General Catalyst.

“The U.S. and India need each other in technology,” Taneja told DealBook in an email. “The U.S. has to recognize the strength and needs of India’s economy and build a feedback cycle that avoids the digital cold war we currently find ourselves in with China. This is all the more pressing in the midst of the global debate over A.I. and the need to adopt basic guardrails worldwide so the future of the technology is not dictated by nefarious actors.”

But hard questions about India went unanswered. Biden and Modi largely brushed off criticism of the Indian government’s crackdown on human rights and religious freedom. And Modi made no pledges to endorse U.S. efforts to restrain China, nor to cut ties to Russia. (Speaking of which, this investigation by The Times into how India profits from buying and refining Russian crude oil is a must-read.)

That may be because the White House and business leaders are focused on India’s population of 1.4 billion, its growing appetite for consumer goods and its explosion as a manufacturing hub. “I’ve long believed that the relationship between the United States and India will be one of the defining relationships of the 21st century,” Biden said on Thursday.

In other India-U.S. news: Federal prosecutors in Brooklyn and the S.E.C. are reportedly scrutinizing the Adani Group, the conglomerate run by the Modi ally Gautam Adani, after it was criticized by an American short-seller, according to Bloomberg.

“The church will follow not just the science, but our faith — both of which call us to work for climate justice.”

— Justin Welby, the archbishop of Canterbury (and a former oil industry executive), on the decision by the Church of England to sell its shares in major oil companies, including Shell, BP and Exxon, over frustration that they were not doing enough to combat climate change.

Qatar makes a play for the N.B.A.

Basketball fans on Thursday were transfixed by the San Antonio Spurs selecting Victor Wembanyama as the No. 1 pick in this year’s N.B.A. draft. Analysts have long pegged the French seven-footer, perhaps the most highly anticipated draft pick since LeBron James, as a game changer.

But a lower-profile development also promises to reshape the league: Qatar’s sovereign wealth fund is in talks to buy a piece of the Washington Wizards’ parent company at a $4.05 billion valuation, as first reported by Sportico.

Qatar is seeking a 5 percent stake in Monumental Sports and Entertainment, which owns the Wizards (and the Washington Capitals in the N.H.L.), in what would be the country’s first investment in a major American sports league. The oil-and-gas-rich country wouldn’t have any say in how the Wizards are run, but its money could help finance further expansion by Monumental.

The talks represent the next step in the N.B.A.’s efforts to open up the universe of league ownership, which started with private equity firms and expanded to other institutional investors like family offices and, yes, sovereign wealth funds. (Also reported on Thursday were talks by Omers, a big Ontario public pension fund, to take a 20 percent stake in the parent company of the Toronto Raptors of the N.B.A.)

It’s the latest move into sports by Middle Eastern funds, whose coffers are bulging with petrodollars and which have been eager to build up soft power by buying into global brands.

Through a different entity, Qatar owns the Paris Saint-Germain soccer club, while a member of the country’s royal family has bid for Manchester United of England. And this month Saudi Arabia helped broker a potential deal between LIV Golf, the upstart competition it has backed, and the PGA Tour.

Critics have said that the flood of Middle Eastern wealth into sports is an effort by Persian Gulf states to whitewash accusations of human rights abuses against them. Still, sports leagues thus far have shown little inclination to turn down the money.