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German inflation, January 2025

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Customers waiting at the checkout in a supermarket.

Markus Scholz | Picture Alliance | Getty Images

German inflation was unchanged year-on-year at 2.8% in January, preliminary data from the country’s statistics office Destatis showed Friday in the last reading before Germans head to the polls next month.

The reading was also in line with a forecast from economists polled by Reuters. The print is harmonized across the euro area for comparability. 

On a monthly basis, the harmonized consumer price index fell by 0.2%

Germany’s inflation rate has now stayed above the European Central Bank’s 2% target for the fourth month in a row, after falling below that threshold in September last year.

This roughly mirrors the development of re-accelerating inflation in the wider euro area. The European Central Bank on Thursday said that disinflation in the bloc “is well on track” and has broadly developed in line with staff projections.

Euro area inflation came in at 2.4% in December. The January figures are slated for release next week.

The January inflation print is among the final key economic data released before Germany’s election on Feb. 23, which is taking place earlier than originally scheduled after the collapse of the ruling coalition in November 2024.

Germany’s economy has been one of big topics during campaigning next to immigration, as the country has been grappling with lackluster economic growth and the renewed rise of inflation.

The government earlier this week slashed gross domestic product expectations to 0.3% for full-year 2025, after annual GDP contracted in the last two years. Quarterly growth has also been sluggish, even as the economy has so far avoided a technical recession characterized by two consecutive quarter of contraction.

Non-harmonized inflation is expected to average 2.2% this year, the government added in its annual economic report.

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Economics

PCE inflation December 2024:

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Customers shop for food at a grocery store on Jan. 15, 2025 in Chicago, Illinois.

Scott Olson | Getty Images News | Getty Images

Inflation closed out 2024 on a strong note, as a price gauge the Federal Reserve focuses on came in well above the central bank’s target.

The personal consumption expenditures price index increased 2.6% on a year over year basis, 0.2 percentage point higher than the November reading and in line with the Dow Jones estimate.

Excluding food and energy, core PCE registered a 2.8% reading, also meeting expectations and the same as the prior month. Though the Fed considers both readings, historically officials have seen core as the better gauge of long-run inflation.

On a monthly basis, headline PCE rose 0.3% while core increased 0.2%, both in line with forecasts as well.

The Fed targets annual inflation at 2%, a level the price gauge has not seen since February 2021.

The report comes two days after the central bank voted unanimously to hold its key interest rate in a range between 4.25%-4.5%, taking a break after three consecutive cuts totaling a full percentage point.

In remarks delivered Friday morning, Fed Governor Michelle Bowman said she expects inflation to decelerate through 2025, but thinks the central bank should stay on hold until there are clear signs that is happening.

“There is still more work to be done to bring inflation closer to our 2 percent goal. I would like to see progress in lowering inflation resume before we make further adjustments to the target range,” Bowman said in remarks before business leaders in Portsmouth, N.H. “I do expect that inflation will begin to decline again and that by year-end it will be lower than where it now stands.”

The report Friday also showed that personal income increased 0.4% as forecast, while spending rose 0.7%, or one-tenth of a percentage point ahead of the estimate.

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Economics

Donald Trump revives ideas of a Star Wars-like missile shield 

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IN THE LATE 1980s Edward Teller, the father of the hydrogen bomb, and Lowell Wood, an astrophysicist, proposed a seemingly bizarre scheme to defend America against missile attack. The “Brilliant Pebbles” system envisaged thousands of small satellites in low-Earth orbit, each housing heat-seeking missiles to take out incoming Soviet nukes long before they released their warheads. The idea faded, not least because the technology seemed distant. Now Donald Trump is resuscitating it.

On the campaign trail Mr Trump promised to build an “Iron Dome” for America, referring to an Israeli missile-defence system. The name is a misnomer. The Israeli system is designed to take out short-range rockets. What Mr Trump meant, and spelt out in an executive order published on January 27th, was a more ambitious effort to detect and counter intercontinental ballistic missiles (ICBMs) and the like. America already has a system designed to do that, known as Ground-Based Midcourse Defence (GMD), which relies on interceptors in Alaska and California.

Mr Trump’s proposal differs in important respects. One is its scope. GMD was intended to parry limited attacks involving a small number of ballistic missiles, such as might occur in an attack by North Korea. Mr Trump’s shield is supposed to block “any foreign aerial attack”, which would imply not only both cruise and ballistic missiles, but also a full-scale strategic attack by Russia or China involving many hundreds of missiles at once.

Critics of missile defence say this is folly, because it is generally cheaper to build additional offensive systems than interceptors to stop them. Russia and China—which are building missile shields of their own—have also argued that American defences risk undermining nuclear deterrence, because they might one day allow America to strike enemies without fearing retaliation. Advocates retort that the missile threat has changed: long-range non-nuclear missiles could now paralyse military facilities in the continental United States, allowing enemies to coerce America into staying out of a distant war.

In any case, Mr Trump’s favoured design is also noteworthy. GMD targets incoming missiles when they are in mid-flight. In theory it is easier to take out a missile in its “boost phase” (as it is taking off), when it is moving more slowly. The problem is that this is a fleeting moment—three to five minutes for ICBMs.  The new order calls for “proliferated space-based interceptors capable of boost-phase intercept”. That amounts to a Brilliant Pebbles-like system: a lot of small, armed satellites, some of which would be above Russia, China and other foes at all times.

The cost of building tiny computers and putting thousands of them into orbit is far lower than it was in Mr Teller’s days—partly thanks to Elon Musk. But it is still eye-wateringly expensive, and liable to hoover up a good chunk of the defence budget. America would require 500 satellites in total to have just three to four interceptors in range of North Korean launchpads, estimates Bleddyn Bowen of Durham University; hundreds more than that would probably be needed, he says.

A key technical challenge will be building space sensors with “fire-control-quality tracking”—good enough at spotting and tracking enemy missiles to guide interceptors to them—says Tom Karako of CSIS, a think-tank. But if the technology proves mature, the implications could go beyond missile defence. “We will see the emergence, gradual understanding, and eventually acceptance of ‘space fires’,” says Mr Karako, which could include satellites capable of targeting, with both explosive and electronic means, targets on the ground, those in the air and other satellites in orbit.

There are many doubters. Mr Trump aired similar ideas in his first term but failed to back them with hard cash. Spending for an American Iron Dome will compete with a string of other priorities, from a bigger navy to more nuclear weapons. “It’s always a budget question,” says Mr Karako. “Show me your budget for missile defence, and I’ll tell you what your ‘Iron Dome for America’ is.”

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Economics

An alternative theory to explain America’s murder spike in 2020

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You might call it a new golden age. America’s economy is strong, overdose deaths are falling and crime rates are down. For the second consecutive year murders in America have plummeted. The surge in violence in 2020, which was the deadliest year in over two decades, may now seem like a distant memory to some. Yet for criminologists and policymakers the question of what caused that spike in the first place remains unanswered.

A popular theory, advanced prominently by Heather Mac Donald of the Manhattan Institute, a think-tank, is that it was caused by a “George Floyd effect”. The theory is as follows: after the murder of Floyd by police officers in Minneapolis in 2020, police lost trust in high-crime communities and among African-Americans, leading to lower clearance rates for murders. When people think they will not get caught, they commit more crime. Another version of the Floyd effect thesis holds that police officers, beset by rising public hostility, deliberately pulled back from high-crime neighbourhoods, for fear of being prosecuted for doing their jobs. Either way, protests against police brutality lead directly to more murders, a bitter unintended consequence for the protesters and, perhaps, evidence of the kind of soft liberalism from big-city Democrats that Donald Trump was elected to expunge.

A recent report from the Brookings Institution, a think-tank, advances an alternative theory. Rohit Acharya and Rhett Morris, the report’s authors, argue that the rise in murders began in April 2020, about six weeks before the murder of Mr Floyd. They contend that high unemployment and school closures in poor neighbourhoods, both brought about by covid-19 and the policy response to it, left teenage boys idle. This, not the Floyd effect, was responsible for the murder spike. This would suggest an awful trade-off: those early lockdowns saved many lives, but they also may have resulted in more murders.

Chart: The Economist

Using weekly national homicide data, Messrs Acharya and Morris show that throughout the summer of 2020 murders rose 30% compared with the summer of 2019. Crucially, they do not find an inflection point around the end of May, when Mr Floyd was killed. Across the six weeks preceding his death national weekly murders increased by around 17 murders per week, a rate 70% greater than the same period in 2019. And during the six weeks following his death, murders rose at a similar rate.

What, then, caused this increase? The authors theorise that the economic circumstances of the pandemic are to blame. Criminologists concur that, in general, poverty correlates with crime rates. In Atlanta, 65% of all homicides occur in neighbourhoods where at least 30% of the population lives below the poverty line. Nearly every big American city displays this trend. Poorer neighbourhoods were also disproportionately affected by the pandemic: job losses and high-school dropout rates were far higher. Cities with a greater share of young men living in these conditions saw larger increases in homicides in 2020.

Juveniles typically commit few murders. Though roughly half of murders go unsolved and not all jurisdictions report the age of the murderer, the available data suggest that fewer than 10% of homicides are committed by those under the age of 18. Yet between 2019 and 2020 juveniles accounted for an estimated 15-20% of the overall surge. That seems consistent with the idea that closed schools and idle teenage boys are a big part of the story.

Criminologists tend to be wary of single explanations. “It’s very difficult to come up with a definitive conclusion about what happened in 2020, because so many things changed at the same time”, says Aaron Chalfin, a criminologist at the University of Pennsylvania who was not involved with the Brookings report. He notes that, in the past, unemployment rates have not correlated with murder rates, although that does not necessarily mean no such relationship arose during the pandemic. And teasing out the interactions between variables is trickier still. Were school closures in poorer neighbourhoods responsible for juveniles committing more murders, or was it school closures plus fewer police officers patrolling the streets?

The research, says Neil Gross, a professor of criminology at Colby College (who was also not involved in the study), suggests that the nature of social ties in poor areas matters. Crime is often lower where “people know their neighbours and can look out on the street for errant teenagers and contact their parents”, says Mr Gross. That suggests yet another potential suspect: such neighbourhood watchers were locked down at home. 

Stay on top of American politics with The US in brief, our daily newsletter with fast analysis of the most important political news, and Checks and Balance, a weekly note from our Lexington columnist that examines the state of American democracy and the issues that matter to voters.

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