Inflation, the Hamptons and an $800 grocery cart

This is an audio transcript of the FT News Briefing podcast episode: Inflation, the Hamptons and an $800 grocery cart

Marc Filippino
Good morning from the Financial Times. Today is Friday, September 16th, and this is your FT News Briefing.

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Marc Filippino
China’s local governments squeezed by the property crisis have found a way to bail themselves out. Liz Truss wants a top British chip designer to list in London. And the FT’s Rana Foroohar says wealthy Americans and their spending habits may be adding to inflation. I’m Marc Filippino and here’s the news you need to start your day.

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Marc Filippino
China’s property bubble is deflating and the plunge in sales is painful for China’s local governments. They’ve relied on land sales for a long time. It’s made up to half of their revenue. And now the FT has found local governments are using their investment arms to buy up land themselves. Here’s our China economics reporter Sun Yu.

Sun Yu
China’s property market is at sort of a watershed in the sense that demand for housing is difficult to recover to its pre-crisis level. Given the crackdown on speculation and given that there’s fundamental change in people’s mindset that real estate is no longer the best investment that they should have. And that has led to a fundamental shift in how local authorities or Chinese cities finance themselves. They can’t rely on real estate sales or land sales to make ends meet. But for now, we can’t find another source of income so they have to temporarily rely on their own financing vehicles to bridge the financing gap.

Marc Filippino
All right. So cities are using local government investment vehicles to buy up land that in the past would have been bought up by private developers. Is this strategy working?

Sun Yu
I mean, it helped to offset the huge decline in fiscal revenue. To that degree, it is working. But the strategy relies on the assumption that at some point the home prices will go up, which then will drive up land prices and demand for land. The thing is, there’s basically this oversupply of homes in many small cities. And local government investment vehicles are most active in buying land in these cities with relatively weak demand for housing even in the medium to long term. So that creates the question of how would these local government investment vehicles do with the land they purchase if there is no demand for housing or little demand for housing?

Marc Filippino
That’s our China economics reporter Sun Yu.

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Marc Filippino
UK Prime Minister Liz Truss is hoping to score political points with an effort to convince British chipmaker Arm to list in London. Truss and her chancellor Kwasi Kwarteng are pushing for high-level talks with Arm’s owner SoftBank. Arm is currently set to IPO in New York. SoftBank suspended plans for a rare dual listing in London and New York this summer. It was worried about political turmoil in the UK under then-prime minister Boris Johnson. SoftBank is expected to make a decision on where to list in the next couple of months.

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Marc Filippino
Stock markets tumbled this week after the latest US inflation numbers showed prices rising more sharply than expected. The August consumer price index showed higher prices for food, housing and cars, among other things. Now, we’ve talked about various reasons for this high inflation, like the war in Ukraine. But the FT’s global business columnist, Rana Foroohar, thinks another factor may be rich people and their spending habits. She joins me now to discuss this. Hey, Rana.

Rana Foroohar
Hey, how are you?

Marc Filippino
I’m doing all right. So, you described in a recent column that you were in the Hamptons. It’s a famously affluent vacation spot about two hours outside New York City. And you went shopping and one cart, one grocery cart set you back 800 bucks. What was in that cart?

Rana Foroohar
Yes, it’s very funny because I have gotten so many reader responses saying, what did you put in the cart? Guess what, folks? I put normal groceries in the cart. Now I will say it was a big cart and I’m really good at packing it in. But it was $800 and it was the IGA, you know, which is I mean, I was not going to one of these sort of foodie emporiums that you find at (laughter) in the Hamptons. And I started talking to some locals and I said, “Are you shopping at this store? Where do you shop?” And they said, Oh, no, no, no, no. We’ve noticed so much inflation in the centre of town in these vacation areas where you have a high percentage of not even the 1% but the .001% that have homes there. Or people like me that have saved up all year to go on vacation for a couple of weeks there and have enough money to do so. We’re a captive audience and so the inflation rate is higher. And so locals are now driving, you know, an hour away to the Costco. So that made me start thinking about asset inflation.

Marc Filippino
OK. So we’re talking about stocks and bonds and real estate rising in value. And the people who own them, like the folks we’re talking about in the Hamptons, they get even richer. So when they spend their money, Rana, how does that add to inflation?

Rana Foroohar
I think that asset inflation and the fact that there are now so many wealthy people, you know, the top 25 per cent or so of the socio-economic spectrum in this country is doing the vast majority, like 60 per cent of the spending. So if they can keep spending, even as the Federal Reserve raises rates in order to try and cool down the economy, that’s having a big impact. Not so much on them. I mean, yeah, you know, and I will have to put myself in this category. I go in to a grocery store. I feel price hikes. I may be starting, when I see, even at my local shop in Brooklyn, if I’m paying $500 or $600 for a big grocery shop, I may be starting to think, you know what, let me get the generic Cheerios or whatever. I might start to think that. But I’m not really changing my behaviour massively yet, you know. I’m not giving up meat for beans like a lot of working people, particularly in the lower quintile, are doing. And so that division is really starting to impact how our economy works. And I think it’s worth us all thinking about and it’s worth policymakers grappling with.

Marc Filippino
So if the Fed raising interest rates isn’t enough to curb wealthy spending, which, you know, you say is causing inflation to get worse, what actually can be done to curb that kind of spending here?

Rana Foroohar
Well, I think it’s a matter of time. I think that when you raise rates, eventually it will have an effect. But I think the effect is going to be more delayed. I think it’s gonna take longer. I think that there is going to be a longer period of more rate hikes than the markets may be counting for right now. And then, as always, when you have a period like we’ve had of really easy money for a long time, it takes a lot to deflate the bubble. And then when the bubble bursts, it can really be much more problematic. So these are the things that I worry about. You know, are we at some point going to see a very sharp contraction in the economy, a hard landing, as you know, as people call it? And ultimately, you know, in housing markets and in other parts of our economy.

Marc Filippino
So when you go to the Hamptons, maybe next year, do you think things will be different when you fill up your shopping cart?

Rana Foroohar
Guess what, Marc? I’m not going to the Hamptons next year. I’m going to Catskills. (Laughter) ‘cause I’m sick of paying $800 for groceries.

Marc Filippino
(Laughter) Well, we’ll talk to you from the Borscht Belt next year. (Laughter) Rana Foroohar is the global business columnist. Thanks, Rana.

Rana Foroohar
Thank you.

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Marc Filippino
Before we go, Russia and China may not be as perfectly aligned as we all might have thought. Yesterday, Russian president Vladimir Putin was in Uzbekistan. He met with China’s president, Xi Jinping. And Putin acknowledged that China has, quote, “concerns about the war in Ukraine”. It’s the first public admission of differences between the two countries. China’s foreign ministry made no mention of this. One analyst said China’s leader probably told Putin he wants the war and all the economic disruption that comes with it to end.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news.

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Marc Filippino
The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from David da Silva, Michael Lello and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.