WEBVTT - Here's Why Inflation Could Be A Bigger Problem in 2025

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>I'm Stephen Carroll, and this is Here's Why, where we

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<v Speaker 2>take one news story and explain it in just a

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<v Speaker 2>few minutes with our experts here at Bloomberg. Central bankers

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<v Speaker 2>have good reason to celebrate. They've managed to bring inflation

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<v Speaker 2>in the world's major economies down close to their target,

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<v Speaker 2>but they're remaining cautious. It's often been said that the

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<v Speaker 2>last mile may be the hardest, and this is where

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<v Speaker 2>we are now. When you're in a dark room, you

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<v Speaker 2>have to be very careful in order to try to

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<v Speaker 2>avoid making a mistake. Ultimately, we want to get inflation

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<v Speaker 2>back down to our two percent target.

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<v Speaker 1>We're not aiming to undershoot it, and so we do

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<v Speaker 1>have to make.

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<v Speaker 2>Some judgments about what is the path ahead for inflation

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<v Speaker 2>in Europe and in the US. Inflation has been slowing

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<v Speaker 2>for most of this year, but that trend is getting bumpy,

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<v Speaker 2>and all of a sudden, it's less clear it'll go

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<v Speaker 2>from here. So here's why inflation could be a bigger

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<v Speaker 2>problem in twenty twenty five. Bloomberg Opinion Columbus Daniel Mass

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<v Speaker 2>joins me now for more. Daniel, first of all, can

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<v Speaker 2>we say that the twenty twenty two inflation crisis is

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<v Speaker 2>behind us.

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<v Speaker 1>Yes, well, and truly if you look at the central

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<v Speaker 1>bank that is first among equals. The FED has a

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<v Speaker 1>target of two percent inflation, an average of two percent

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<v Speaker 1>over time, according to an indicator called PCEE. Okay, So

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<v Speaker 1>in twenty twenty two, around the middle of that year,

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<v Speaker 1>PCEE was above seven. Okay, So you know, we've come

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<v Speaker 1>down a very significant way. And that is the same

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<v Speaker 1>in many jurisdictions that we watch. The differences where they

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<v Speaker 1>do exist alive nuance are set. Aside China, second largest economy,

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<v Speaker 1>it's in a slightly different basket. China has the opposite

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<v Speaker 1>problem it's been wrestling with for a while, which is

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<v Speaker 1>that inflation is too low. So China's operating on a

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<v Speaker 1>different cycle. But in most of the developed markets and

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<v Speaker 1>in quite a few of the emerging markets, inflation, as

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<v Speaker 1>manifested by the kind of language we used a couple

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<v Speaker 1>of years ago, is yesterday's problem.

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<v Speaker 2>So we are well down the hill from the peak

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<v Speaker 2>of inflation. But there is a bit of steckiness appearing

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<v Speaker 2>in some places. What elements could prove troublesome.

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<v Speaker 1>Look, it's not that people are suddenly seeing a surge,

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<v Speaker 1>you know, a return to twenty twenty two situation. The

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<v Speaker 1>governor of the Reserve Bank of New Zealand, fresh from

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<v Speaker 1>a fifty basis point cut the second in as many meetings,

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<v Speaker 1>was asked this question. He's like, no, no way. He

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<v Speaker 1>foresees nirvana. As a matter of fact. Now, you know,

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<v Speaker 1>one needs to be careful not to extrapolate too much.

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<v Speaker 1>But they were the world's first inflation targeting central bank,

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<v Speaker 1>and get a lot of cutos. It's part of the

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<v Speaker 1>monetary folklore of the post nineteen forty five era. So look,

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<v Speaker 1>this promising situation of inflation tamed of mission, pretty much accomplished,

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<v Speaker 1>but don't shout it too loudly. What's caused elements of

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<v Speaker 1>doubt to appear in that scenario, and that has been

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<v Speaker 1>the election and Donald Trump's foreshadowing of a muscular to

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<v Speaker 1>put it mildly, fiscal policy, deregulation and also tariffs. Now

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<v Speaker 1>these things are all seen as strengthening the dollar and

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<v Speaker 1>if anything, certainly putting a flaw under disinflation and possibly

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<v Speaker 1>pushing inflation up a little bit. But we'll see. So

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<v Speaker 1>I think a fascinating question that we're going to be

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<v Speaker 1>wrestling with over the next few years. Is was the

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<v Speaker 1>inflation surge of twenty twenty one, twenty twenty two, and

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<v Speaker 1>part of twenty twenty three, you know, a blip and

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<v Speaker 1>we go back to where we were with low inflation.

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<v Speaker 1>Janet Yellen's famous mystery comment or was that at the

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<v Speaker 1>start of something new where inflation is constrained from its

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<v Speaker 1>high levels but can't drop back to the levels that

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<v Speaker 1>it enjoyed before the pandemic. So the election sort of,

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<v Speaker 1>you know, injected an element of doubt in this. You know,

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<v Speaker 1>goldilocks could still happen, okay, but before we taste the porridge,

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<v Speaker 1>you know, there might be a few interesting little hiccups

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<v Speaker 1>along the way.

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<v Speaker 2>What scale of heckups should we expecting or perhaps considering

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<v Speaker 2>given some of those elements you laid out, things like

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<v Speaker 2>tariffs if you're in the US that could have pushed

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<v Speaker 2>up prices there, or the strong dollar that could have

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<v Speaker 2>an effect outside of the US. Are we talking about

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<v Speaker 2>inflation could bump back up to three presentesh or could

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<v Speaker 2>we be thinking about it potentially going higher than that?

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<v Speaker 1>Depends what measure you're talking about. So core PCE is

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<v Speaker 1>quite a bit higher than two point one. It's around

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<v Speaker 1>two point seven two point eight. Do I foresee it

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<v Speaker 1>going to something like four? No, JP Morgan. Economists were

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<v Speaker 1>discussing this on a recent podcast. I know you're a

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<v Speaker 1>fan of podcasts, so I raised this. They were talking

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<v Speaker 1>about whether there would be a New Testament FED or

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<v Speaker 1>an Old Testament fed, you know, an unforgiving FED or

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<v Speaker 1>a forgiving FED. Work. You can be more or less

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<v Speaker 1>okay with PCE between two and three, but beyond that

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<v Speaker 1>you start to worry. You know, the International Monetary Fund

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<v Speaker 1>gets mixed reviews. It's fair to say they have done

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<v Speaker 1>a lot of work on their economic forecasting, and according

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<v Speaker 1>to the chief economists of the IMF, this is almost

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<v Speaker 1>mission accomplished in terms of inflation. And it's been accomplished

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<v Speaker 1>without a global risk. Go back to the dark days

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<v Speaker 1>of twenty twenty two, there was a fairly common idea

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<v Speaker 1>around that it was going to take a recession to

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<v Speaker 1>ring this post COVID inflation out of the system. Well,

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<v Speaker 1>that hasn't happened. We do need to be prepared to

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<v Speaker 1>question consensus. I think we should also question, in terms

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<v Speaker 1>of tariffs, what actually becomes law and for how long

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<v Speaker 1>so Trump is foreshadowed higher tariffs on Mexico. I don't

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<v Speaker 1>think they're allowed under USMCA, which was the revised and

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<v Speaker 1>after which he called the best agreement ever. So is

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<v Speaker 1>he now saying it's not the best agreement ever? Let's

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<v Speaker 1>wait and see what actually happens.

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<v Speaker 2>Do central bankers need to be thinking about, perhaps, if not,

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<v Speaker 2>a new playbook for this sort of era, maybe adding

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<v Speaker 2>a few seats at the back to decide how they

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<v Speaker 2>handle something like.

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<v Speaker 1>This new playbook. I don't know. Look, I should say

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<v Speaker 1>central banking is always evolving. The central bank that people

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<v Speaker 1>most closely watch, the Federal reservers going intoards once every

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<v Speaker 1>five years review of its monetary policy framework. They conducted

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<v Speaker 1>the last one in the teeth of COVID and came

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<v Speaker 1>out with inflation would need to average two percent over time,

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<v Speaker 1>little bit of squishness. At the time, the perception was

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<v Speaker 1>that would allow them to reduce the economy some more.

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<v Speaker 1>Do they inject any nuance or wrinkle into that they've

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<v Speaker 1>got the opportunity to do so? They probably regret back

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<v Speaker 1>then introducing that extra level of flexibility that there may

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<v Speaker 1>be loath to say.

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<v Speaker 2>So.

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<v Speaker 1>The short answer is new playbook. I don't know. Variations

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<v Speaker 1>on the old one quite possibly. Look, it's an art

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<v Speaker 1>that's constantly evolving in response to new challenges, but whole

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<v Speaker 1>new playbooks don't come around every day.

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<v Speaker 2>Bloomberg Opinion colomist Daniel Mass thank you, and you could

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<v Speaker 2>read Daniel's latest writing on their subject. Trump makes it

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<v Speaker 2>hydro to get goldilucks just right At Bloomberg dot com,

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<v Speaker 2>Forward Slash Opinion for more explanations like this from our

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<v Speaker 2>team of twenty nine hundred journalists and analysts around the world.

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<v Speaker 2>Search for Quick Take on the Bloomberg website or Bloomberg

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<v Speaker 2>Business app. I'm Stephen Carroll. This is Here's why. I'll

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<v Speaker 2>be back next week with more. Thanks for listening.