Cover Story

We have two covers this week. In our Europe edition we write about Ukraine’s future as a prosperous, democratic country. Elsewhere, we focus on the dangers of persistent inflation—a theme that gave us the chance to practise a rare visual backflip.

Our inflation coverage has two dimensions, and we had to decide which one to highlight. The cover leader looks at the dilemma facing the rich world’s central bankers. If they crush inflation, as their mandates require, they will probably cause a recession. If they don’t, they could allow prices to run away. What will they do? The briefing takes a different tack, asking how investors should prepare.

Here are those two dimensions on the page. The image on the left shows a sticky lump of plastic that you just cannot shake off. Central bankers vow that they are determined to meet their targets. However, the costs of inducing a recession, together with persistent pressures on inflation—including investment in cutting carbon and resilient, but less efficient, supply chains—suggest another scenario: that central bankers will duck their nightmarish trade-off, by raising rates less than is needed to hit their targets. That leads to a world of inflation at 3% or 4%.

The other sketch features a giant buzzsaw eating into investors’ returns plotted on a bar chart. The price of inflation-linked Treasuries implies average inflation expectations of 2.1% over the next five years, just above the Federal Reserve’s target. It means that a world of higher sustained inflation would trigger an epochal shift in financial markets.

This rusting hulk, and its finished incarnation as the Bowling Green Bull in Manhattan, also dwells on the misfortune of investors. If central bankers pay lip service to their unmet targets, they could lose the ability to guide the expectations of businesses and their workers, leading to lurches in prices. That volatility would hurt companies, and their shares, by making it harder for them to manage costs and set prices. It would also hurt virtually every asset class by raising the likelihood that central banks would have to rush to adjust rates after an unexpected flare-up. If that brought large swings in real yields, investors would demand a discount in compensation for the uncertainty, forcing asset prices down.

We preferred this, however. It’s simple and summery, and it’s real. Everybody knows what it’s like when your ice-cream runs. Investors seem to believe that today’s situation can still end well, but the chances are that it won’t.

On Wednesday, as we were putting the issue together, the news came that Britain’s inflation was worse than expected. Wages and “core” prices, which exclude energy and food, are rising by around 7%, year on year. 

That was what led to our backflip. Only very rarely do we tweak covers for different editions, but we decided to swap in a £5 note for our British readers. It’s hardly a vote of confidence: £5 for $1 really would mean that inflation was out of control.

Ukraine is waging war on two fronts. On the 1,000km-long battlefront its armies are attacking the Russians’ deep defences. At the same time, on the home front, Ukraine is defining what sort of country it will be when the fighting stops. Both matter. 

The home front is less dramatic, but everything depends on it. Russia may continue to occupy tracts of land, but if Ukraine ends up prosperous, democratic and secure, then Vladimir Putin’s war will have failed. By contrast, if Ukraine takes back territ­ory only to sink into a morass of corruption, poverty and polit­ical violence, it will have surrendered the ideals for which its citizens have fought so bravely. 

Here we have two images of the new Ukraine, one wiping the dirt away, and the other a sunflower growing out the ruins. Both are powerful symbols of hope. However, we thought that this cover should not be a rousing call to arms so much as a sober warning about the mountain of work that lies ahead.

The prophet Isaiah urged the nations to beat their swords into ploughshares and their spears into pruning hooks. Here we evoke the home front with a rifle that has been transformed into a spade. To succeed, Ukraine must work on many dimensions while the fighting rages. 

To attract workers and private capital, the country needs to rebuild itself. To unleash the creativity and enterprise of its cit­izens, it must live by the rule of law. To deprive Mr Putin of a veto over its prosperity, it must ensure that its skies and cities are safe enough from Russian aggression for normal life to flourish. Each of these depends on the others, and work should start on them now.

The rifle/spade was clever, but a bit flat. Over the past 16 months, since the invasion, we have had a lot of Ukrainian flags. Even so, we liked this patchwork of material because it shows how the new Ukraine, which its architects like to call Ukraine 2.0, will have to be bodged together with stuff that is to hand.

So far Ukraine is struggling on the battlefront. If its counter-offensive stalls, an even greater burden will fall on the home front. All the more reason for Ukr­aine and its allies to press ahead right now.