Will rising interest rates actually lower prices?

This is an audio transcript of the FT News Briefing episode: Will rising interest rates actually lower prices?

Marc Filippino
Good morning from the Financial Times. Today is Thursday, July 14th, and this is your FT News Briefing.

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Scorching prices could mean higher interest rates, but will that cool inflation? And Ukraine and Russia are making progress on grain talks, says the United Nations. Plus, a partnership between Europe and China to put satellites in space went very, very wrong. And there’s a larger tale to tell.

Eleanor Olcott
The nub of the story is really what these low-earth orbit constellations will mean for the future of telecommunications and how countries and governments are going to regulate this increasingly competitive space.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

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Markets barely reacted to the latest US inflation numbers out yesterday and they were worse than expected. Prices for June rose 9.1 per cent over last year. But there’s a lot to say about what this number means for the Federal Reserve and the economy. Here to break this down is the FT’s US economics editor, Colby Smith. Hey, Colby.

Colby Smith
Hi, Marc.

Marc Filippino
So, Colby, the market really hasn’t reacted to this? I mean, yesterday, the S&P 500 was down like half a per cent. Why is that?

Colby Smith
I think most notably, we’ve had a really big shift in interest rate expectations for the Federal Reserve and its upcoming policy meeting at the end of the month. Prior to this inflation report, essentially economists and market participants were pricing in a very high likelihood that the Fed was going to proceed with another 75 basis-point interest rate increase. But what we did see over the course of yesterday was the fact that the odds for a full percentage point interest rate increase have jumped quite significantly. So that’s going to be a challenge, I think, for the Fed as it contemplates what actually to do at the end of the month, especially when you have investors essentially pricing in that outcome.

Marc Filippino
And yesterday we saw that, right? Like, we saw the Bank of Canada announce that they were gonna raise rates. Like, central banks are not kidding around when it comes to trying to get inflation under control. But is it gonna work? I mean, is this gonna make a difference?

Colby Smith
I think that’s the big question. The important point to note about monetary policy that you hear quite often is that it works with long and variable lags. So no one’s really anticipating that the Fed moving 75 basis points or 100 basis points at the meeting at the end of the month is going to make a demonstrable difference on inflation, on realised inflation, ie the inflation that we’re seeing in these consumer price reports each month.

Marc Filippino
Now, President Biden yesterday said that this is not a good indicator of where we are now because fuel prices dropped in July. What are economists saying about where inflation is headed and could June be a peak?

Colby Smith
So that is certainly going to help headline inflation. But I think what economists are most concerned about, especially in the most recent reading of inflation, is the fact that core prices, which are ones that strip out volatile items like food and energy, those are continuing to rise at a pretty rapid clip. And what that essentially means is this inflation problem goes well beyond supply-related issues. It goes well beyond the spike in energy prices. The fear and the expectation really is that inflation prints are gonna stay quite high and well, well, well above the Fed’s 2 per cent target for quite some time.

Marc Filippino
Colby Smith is the FT’s US economics editor. Thanks, Colby.

Colby Smith
Thank you.

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Marc Filippino
Military officials from Russia and Ukraine have been negotiating the safe passage of grain through the Black Sea in order to avoid a global grain crisis. The talks are backed by the United Nations. And yesterday, UN secretary-general António Guterres said the two sides have made very substantive progress after this first round in Istanbul. About 20mn tonnes of grain are trapped in Ukraine as a result of a Russian blockade on Ukraine’s ports. Guterres suggested a final deal could be reached as soon as next week.

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There’s a new space race brewing. Companies are vying to dominate the business of low-earth orbit satellites and ultimately, the future of telecommunications. Right now, the top player is Elon Musk’s SpaceX. But a few years ago, a German company teamed up with Chinese investors to try and take on SpaceX. The project ultimately failed and a lot of that had to do with geopolitics. Our China correspondent Eleanor Olcott wrote about this project called Kleo Connect and she joins me now to talk more about it. So, Ellie, how did a German company link up with Chinese investors?

Eleanor Olcott
The partnership began really in the mid-2010s. The German space entrepreneurs were looking for investment for their low-earth orbit constellation. They went to the US. They tried to find investors in Europe and eventually settled on Chinese investors, a consortium of state-backed investors who agreed to provide the financing and some of the technological support to develop this incredibly ambitious project.

Marc Filippino
And what exactly was it trying to achieve?

Eleanor Olcott
So they wanted to build a satellite constellation that would service, in the Chinese’ words, customers from fishing boats to the Shanghai ports. They were going to initially put up 300 low-earth orbit satellites. And basically the proximity to the planet means that these kinds of constellations can deliver much faster internet connection than the geostationary satellites that we’ve been primarily using. So these LEO satellite constellations really have the capacity to revolutionise certain industries, including high-frequency trading, autonomous driving. And this joint venture between the Germans and the Chinese was intended to be one of the leading satellite constellations in competition with Elon Musk’s SpaceX.

Marc Filippino
So Eleanor, as I understand it from your story, one of the things that attracted the Chinese investors is that the German company had really valuable satellite licences. Companies have to get these licences from a United Nations telecoms agency, but the licences are actually the thing that the two sides ended up fighting over. Why is that?

Eleanor Olcott
The satellite licences that this German company had, Kleo Connect’s, were described to me as being Goldilocks of licences. So that means when the Kleo Connect constellation, if it were to be put up, when it came into the same orbital position or was sharing the same radio frequency with other constellations, the other constellations would have to bow down and give it access in that network. So it was a really, really valuable asset that they had and an asset which became the subject of an intense and acrimonious battle between the German side and the Chinese side.

Marc Filippino
So how did the dispute begin?

Eleanor Olcott
The dispute almost started from day one. The moment that they signed the contracts, they started fighting on details as small as expats’ relocation packages, to as big as the choice of satellite manufacturer. Eventually, the Germans started to grow suspicious that the Chinese were trying to steal the constellation for use in China. And the Chinese then argued that the Germans eagerly took their money only to conspire behind their backs to sell the licences to a new bidder. So at the end of the joint venture’s life, you have this new third party coming in, a US telecoms company called Rivada, with links to the Republican Party and the Pentagon, swooping in to snap up these licences. The second, and perhaps more fundamental reason, aside from the kind of corporate differences, was really relations between China and the west have deteriorated substantially. So you have governments, including in DC, in Beijing, growing more and more concerned about the national security challenges posed by the growing number of commercial LEO constellations, including potential military use.

Marc Filippino
So what’s happening now? I understand the Chinese side has filed lawsuits and not just against German partners.

Eleanor Olcott
Yes. There have already been 60 lawsuits that have made their way through German courts just relating to Kleo Connect, itself. The Chinese have also initiated legal proceedings against Rivada, which was the company that has now snapped up the licences and are also initiating legal proceedings against the German partners in Germany and in Liechtenstein. It’s really a question of whether or not either company is gonna be able to have control of these licences with the kind of rocky path ahead in terms of the legal disputes.

Marc Filippino
That’s the FT’s Eleanor Olcott.

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The race to become the next British prime minister is heating up. Frontrunners are emerging. And to hear FT insights into this momentous occasion in UK politics, we’ve got a webinar to tell you about. It’s only for subscribers and it’s called Britain after Boris Johnson. Join our political editor George Parker and colleagues this Friday at 1pm London time. The link is FT.com/afterjohnson. That’s FT.com/afterjohnson. We’ll also put that in the show notes.

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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 tomorrow for the latest business news.

A previous version of this episode stated Canada raised its interest rates by a ‘full basis point’. That has now been corrected to a ‘full percentage point’. We regret the error.

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.