Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: I'm Stephen Carroll, and this is Here's Why, where we
Speaker 2: take one news story and explain it in just a
Speaker 2: few minutes with our experts here at Bloomberg. Central bankers
Speaker 2: have good reason to celebrate. They've managed to bring inflation
Speaker 2: in the world's major economies down close to their target,
Speaker 2: but they're remaining cautious. It's often been said that the
Speaker 2: last mile may be the hardest, and this is where
Speaker 2: we are now. When you're in a dark room, you
Speaker 2: have to be very careful in order to try to
Speaker 2: avoid making a mistake. Ultimately, we want to get inflation
Speaker 2: back down to our two percent target.
Speaker 1: We're not aiming to undershoot it, and so we do
Speaker 1: have to make.
Speaker 2: Some judgments about what is the path ahead for inflation
Speaker 2: in Europe and in the US. Inflation has been slowing
Speaker 2: for most of this year, but that trend is getting bumpy,
Speaker 2: and all of a sudden, it's less clear it'll go
Speaker 2: from here. So here's why inflation could be a bigger
Speaker 2: problem in twenty twenty five. Bloomberg Opinion Columbus Daniel Mass
Speaker 2: joins me now for more. Daniel, first of all, can
Speaker 2: we say that the twenty twenty two inflation crisis is
Speaker 2: behind us.
Speaker 1: Yes, well, and truly if you look at the central
Speaker 1: bank that is first among equals. The FED has a
Speaker 1: target of two percent inflation, an average of two percent
Speaker 1: over time, according to an indicator called PCEE. Okay, So
Speaker 1: in twenty twenty two, around the middle of that year,
Speaker 1: PCEE was above seven. Okay, So you know, we've come
Speaker 1: down a very significant way. And that is the same
Speaker 1: in many jurisdictions that we watch. The differences where they
Speaker 1: do exist alive nuance are set. Aside China, second largest economy,
Speaker 1: it's in a slightly different basket. China has the opposite
Speaker 1: problem it's been wrestling with for a while, which is
Speaker 1: that inflation is too low. So China's operating on a
Speaker 1: different cycle. But in most of the developed markets and
Speaker 1: in quite a few of the emerging markets, inflation, as
Speaker 1: manifested by the kind of language we used a couple
Speaker 1: of years ago, is yesterday's problem.
Speaker 2: So we are well down the hill from the peak
Speaker 2: of inflation. But there is a bit of steckiness appearing
Speaker 2: in some places. What elements could prove troublesome.
Speaker 1: Look, it's not that people are suddenly seeing a surge,
Speaker 1: you know, a return to twenty twenty two situation. The
Speaker 1: governor of the Reserve Bank of New Zealand, fresh from
Speaker 1: a fifty basis point cut the second in as many meetings,
Speaker 1: was asked this question. He's like, no, no way. He
Speaker 1: foresees nirvana. As a matter of fact. Now, you know,
Speaker 1: one needs to be careful not to extrapolate too much.
Speaker 1: But they were the world's first inflation targeting central bank,
Speaker 1: and get a lot of cutos. It's part of the
Speaker 1: monetary folklore of the post nineteen forty five era. So look,
Speaker 1: this promising situation of inflation tamed of mission, pretty much accomplished,
Speaker 1: but don't shout it too loudly. What's caused elements of
Speaker 1: doubt to appear in that scenario, and that has been
Speaker 1: the election and Donald Trump's foreshadowing of a muscular to
Speaker 1: put it mildly, fiscal policy, deregulation and also tariffs. Now
Speaker 1: these things are all seen as strengthening the dollar and
Speaker 1: if anything, certainly putting a flaw under disinflation and possibly
Speaker 1: pushing inflation up a little bit. But we'll see. So
Speaker 1: I think a fascinating question that we're going to be
Speaker 1: wrestling with over the next few years. Is was the
Speaker 1: inflation surge of twenty twenty one, twenty twenty two, and
Speaker 1: part of twenty twenty three, you know, a blip and
Speaker 1: we go back to where we were with low inflation.
Speaker 1: Janet Yellen's famous mystery comment or was that at the
Speaker 1: start of something new where inflation is constrained from its
Speaker 1: high levels but can't drop back to the levels that
Speaker 1: it enjoyed before the pandemic. So the election sort of,
Speaker 1: you know, injected an element of doubt in this. You know,
Speaker 1: goldilocks could still happen, okay, but before we taste the porridge,
Speaker 1: you know, there might be a few interesting little hiccups
Speaker 1: along the way.
Speaker 2: What scale of heckups should we expecting or perhaps considering
Speaker 2: given some of those elements you laid out, things like
Speaker 2: tariffs if you're in the US that could have pushed
Speaker 2: up prices there, or the strong dollar that could have
Speaker 2: an effect outside of the US. Are we talking about
Speaker 2: inflation could bump back up to three presentesh or could
Speaker 2: we be thinking about it potentially going higher than that?
Speaker 1: Depends what measure you're talking about. So core PCE is
Speaker 1: quite a bit higher than two point one. It's around
Speaker 1: two point seven two point eight. Do I foresee it
Speaker 1: going to something like four? No, JP Morgan. Economists were
Speaker 1: discussing this on a recent podcast. I know you're a
Speaker 1: fan of podcasts, so I raised this. They were talking
Speaker 1: about whether there would be a New Testament FED or
Speaker 1: an Old Testament fed, you know, an unforgiving FED or
Speaker 1: a forgiving FED. Work. You can be more or less
Speaker 1: okay with PCE between two and three, but beyond that
Speaker 1: you start to worry. You know, the International Monetary Fund
Speaker 1: gets mixed reviews. It's fair to say they have done
Speaker 1: a lot of work on their economic forecasting, and according
Speaker 1: to the chief economists of the IMF, this is almost
Speaker 1: mission accomplished in terms of inflation. And it's been accomplished
Speaker 1: without a global risk. Go back to the dark days
Speaker 1: of twenty twenty two, there was a fairly common idea
Speaker 1: around that it was going to take a recession to
Speaker 1: ring this post COVID inflation out of the system. Well,
Speaker 1: that hasn't happened. We do need to be prepared to
Speaker 1: question consensus. I think we should also question, in terms
Speaker 1: of tariffs, what actually becomes law and for how long
Speaker 1: so Trump is foreshadowed higher tariffs on Mexico. I don't
Speaker 1: think they're allowed under USMCA, which was the revised and
Speaker 1: after which he called the best agreement ever. So is
Speaker 1: he now saying it's not the best agreement ever? Let's
Speaker 1: wait and see what actually happens.
Speaker 2: Do central bankers need to be thinking about, perhaps, if not,
Speaker 2: a new playbook for this sort of era, maybe adding
Speaker 2: a few seats at the back to decide how they
Speaker 2: handle something like.
Speaker 1: This new playbook. I don't know. Look, I should say
Speaker 1: central banking is always evolving. The central bank that people
Speaker 1: most closely watch, the Federal reservers going intoards once every
Speaker 1: five years review of its monetary policy framework. They conducted
Speaker 1: the last one in the teeth of COVID and came
Speaker 1: out with inflation would need to average two percent over time,
Speaker 1: little bit of squishness. At the time, the perception was
Speaker 1: that would allow them to reduce the economy some more.
Speaker 1: Do they inject any nuance or wrinkle into that they've
Speaker 1: got the opportunity to do so? They probably regret back
Speaker 1: then introducing that extra level of flexibility that there may
Speaker 1: be loath to say.
Speaker 2: So.
Speaker 1: The short answer is new playbook. I don't know. Variations
Speaker 1: on the old one quite possibly. Look, it's an art
Speaker 1: that's constantly evolving in response to new challenges, but whole
Speaker 1: new playbooks don't come around every day.
Speaker 2: Bloomberg Opinion colomist Daniel Mass thank you, and you could
Speaker 2: read Daniel's latest writing on their subject. Trump makes it
Speaker 2: hydro to get goldilucks just right At Bloomberg dot com,
Speaker 2: Forward Slash Opinion for more explanations like this from our
Speaker 2: team of twenty nine hundred journalists and analysts around the world.
Speaker 2: Search for Quick Take on the Bloomberg website or Bloomberg
Speaker 2: Business app. I'm Stephen Carroll. This is Here's why. I'll
Speaker 2: be back next week with more. Thanks for listening.