Threats and freezes

Daily update

UK government borrowing rose in December. Higher interest payments on inflation-linked debt were a significant part of this. Inflation-linked debt is currently tied to the retail price measure (this will change at the end of the decade. Higher energy prices—themselves a function of government policy—can raise interest payments via inflation.
The World Economic Forum at Davos allows policy-makers to pontificate (and for economists to write ). ECB member Knot suggested markets were rightly assuming January and March rate cuts, but was not advocating an accommodative policy.
US President Trump suggested a 10% tax on US consumer of goods from China, starting on 1 February, in addition to threats of 25% import taxes on goods from Mexico and Canada. Rather than follow every threat (which may not be realized), the basic issues are: every 10% tariff is likely to directly raise US consumer prices by 4%; second-round effects (less competition, profit-led inflation) are bigger inflation threats; and selective tariffs can be avoided (up to a third of China’s exports to the US reroute).
Trump froze around USD 300bn of infrastructure spending. Short-term uncertainty over this funding is a mild growth negative. Over the longer term, it is likely to be redistributive (money is spent on lawyers arguing, rather than building infrastructure).