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Speaker 1: We can't say that on it. Hello, and welcome back

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Speaker 1: to the Bloomberg Benchmark Podcast. I'm Tory Stowell, a US

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Speaker 1: economics reporter in DC with Bloomberg News, and I am

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Speaker 1: with my colleagues and co hosts Dan Muss, our executive

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Speaker 1: editor who's calling him from Brazilia today, and Odo, our

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Speaker 1: editor for a Benchmark in San Francisco. Hello. Everyone, Hey, guys, Hi, guys, Dan.

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Speaker 1: What's the coolest thing that you've eaten since you've been there?

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Speaker 1: Without question, steak. This was a federal capital carved out

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Speaker 1: of grassland and designed by architect Oscar Nemea in the

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Speaker 1: fifties and sixties. And really, if you just strive ten

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Speaker 1: minutes from our office or from the Congressional building, you'll

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Speaker 1: essentially find yourself surrounded by ranches. Wow, that's really quiet.

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Speaker 1: Don't know that. Hopefully you've had a chance to listen

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Speaker 1: into some of our previous podcasts. We've talked about things

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Speaker 1: like whether you will get it raised this year and

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Speaker 1: the economics of a mysterious generation of Americans who I'm

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Speaker 1: told are also called snake people. Jim Morrison used to

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Speaker 1: call himself the lizard Man. I think this is something different.

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Speaker 1: But just in case you're tuning in for the first time,

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Speaker 1: where a podcast determined to make the economy interesting and

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Speaker 1: relevant to your everyday life, not about numbers, about an

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Speaker 1: economic narrative. Then it's been a really exciting week in

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Speaker 1: the world economy. An exciting time to be you and

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Speaker 1: responsible for a global economics coverage. Perhaps a little hostess

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Speaker 1: for too. What's stood up to you? Well, it's exciting

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Speaker 1: to be part of the team acty that covers central banks,

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Speaker 1: finance ministries, and macroeconomic data right around the world. This

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Speaker 1: week we went to Norway, where interest rates were cut

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Speaker 1: to a record though that was a big surprise. We

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Speaker 1: had an interest rate cut in Taiwan, and in India

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Speaker 1: we got an interest rate cut that was anticipated. The

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Speaker 1: magnitude of the cut was not only one of about

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Speaker 1: fifty economists surveyed by a Bloomberg actually picked it. Wow.

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Speaker 1: So it sounds like central banks around the world are

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Speaker 1: pretty devish right now. And you know that may include

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Speaker 1: to some extent, the FED, which also took a pass

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Speaker 1: on hiking interest rates in September. Yeah, it'll be interesting because,

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Speaker 1: as we all know, the Fed is eventually going to

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Speaker 1: raise interest rates, probably in the next few months, and

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Speaker 1: there seems to be a real divergence between all these

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Speaker 1: other central banks around the world and then the FED,

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Speaker 1: which is going to tighten really soon. Yeah, I mean,

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Speaker 1: economic conditions are looking pretty rocky right now around the world.

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Speaker 1: You know, commodity prices are down, largely because people are

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Speaker 1: worried about slower growth in China, which is the world's

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Speaker 1: biggest consumer of commodities. And then you have the Euro

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Speaker 1: Area where the inflation rate unexpectedly turned negative inset to

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Speaker 1: member and then Japan is basically flirting with another accession,

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Speaker 1: right hokey Wow, that's really depressing and not a good

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Speaker 1: time to be in the stock market. But I guess

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Speaker 1: here in the US we've been getting some pretty up

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Speaker 1: the economic reports. That's right. We have one big thing

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Speaker 1: doing for us here in the US, and that is

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Speaker 1: a strong consumer thanks to pretty good job growth. Right Dan,

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Speaker 1: the job growth is here. And I was just going

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Speaker 1: to pose a question to the group, whatever happened to

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Speaker 1: American declinism. It doesn't seem all that long ago the

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Speaker 1: narrative was running that the bricks, including Brazil, were ascendant

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Speaker 1: and the West was in decline. Now, granted, some parts

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Speaker 1: of the West aren't doing too well, such as the Eurozone.

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Speaker 1: But you have to say, right now, among the world's

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Speaker 1: major economies, the US is standing tall. We're definitely leading growth,

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Speaker 1: and you've sort of got to wonder whether American consumers

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Speaker 1: are really going to be able to pull it off

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Speaker 1: all by themselves, especially when so many other things are

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Speaker 1: going wrong. That's a great question, and you know it explains,

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Speaker 1: at least in pot the propensity of other central banks

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Speaker 1: to cut interest rights and sometimes cut them very aggressively.

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Speaker 1: Speaking of central banks, my personal highlight was fed Cherry

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Speaker 1: Janet allen big speech last Thursday, which she devoted fully

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Speaker 1: to the state of inflation. Uh. Janna Allen doesn't speak

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Speaker 1: very often, but once she does, we all drop everything

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Speaker 1: else and parse every single word. Gosh, Tori, how long

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Speaker 1: did you say? It was fifty minutes long? Onestlation massive? Yeah,

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Speaker 1: lots of words to parse there. So this week we

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Speaker 1: are going to be following in Jane Allen's great footsteps

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Speaker 1: and devoting our whole show to inflation too, But it

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Speaker 1: is not going to be fifteen minutes. So also at

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Speaker 1: the stage here a little bit. Most things in an

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Speaker 1: economy typically get a little more expensive every year. That's

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Speaker 1: econ one oh one. Inflation measures that speed of consumer

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Speaker 1: price increases, and it's really one of the most important

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Speaker 1: gauges we have to track an economy's health, Tori. It's

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Speaker 1: your favorite, right, Oh yeah, I just love the inflation numbers,

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Speaker 1: like choosing your favorite child exactly, I mean, cover like,

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Speaker 1: I don't know, probably to thirty maybe more economic indicators.

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Speaker 1: Inflation is definitely a hot one. So right now, we

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Speaker 1: actually don't have enough inflation in the US. Um Although

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Speaker 1: that might sound like a great thing to everyday consumers

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Speaker 1: like you and me, economists are really worried, Tore. Do

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Speaker 1: you want to walk us through some numbers. Yeah, So

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Speaker 1: we have two big metrics of inflation that we like

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Speaker 1: to look at. One is called PC and the other

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Speaker 1: is called c p I, And they both sound a

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Speaker 1: little bit like the neural diseases, but we promise they

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Speaker 1: are not. You will never be able to return to

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Speaker 1: the great state of North Carolina. Okay. Anyways, there's some

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Speaker 1: differences between the two for reasons that are just too

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Speaker 1: wanting to get into right now, but suffice it to say,

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Speaker 1: both numbers illustrate the same worrying trend, which is that

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Speaker 1: inflation is not going the way monetary policymakers would like

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Speaker 1: it to. You know, the FED says ideally inflation should

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Speaker 1: be around two percent, which is the target that they

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Speaker 1: set in and we actually have never seen two percent

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Speaker 1: inflation since they set that target. PC, which is the

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Speaker 1: BEDS preferred number, came out on Monday and it showed

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Speaker 1: that inflation rose just zero point three percent from the

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Speaker 1: year before, and the big thing holding it down lately

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Speaker 1: has been plunging oil prices. But even after you strip

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Speaker 1: those energy effects out as well as food prices, which

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Speaker 1: also move around a lot, core inflation is at one

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Speaker 1: point three percent, so obviously below the target here. And

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Speaker 1: the fetish chalked up the weak inflation over the past

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Speaker 1: few years to you know, economic slack, cheap energy, as

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Speaker 1: we said, weak price increases overseas, and a few other factors,

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Speaker 1: and they say these things are transitory and will eventually

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Speaker 1: go away. But the bottom line is that it's still

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Speaker 1: too low, and it's been that way for years at

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Speaker 1: this point, and then that's been the case in a

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Speaker 1: lot of other countries. To write, it's interesting, Accuentry the

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Speaker 1: way that paradigm has shifted back in the late seventies,

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Speaker 1: the eighties, and really through the nineties, and I guess

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Speaker 1: even if you push it the start of the odds,

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Speaker 1: the narrative was we don't want inflation. Inflation is a

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Speaker 1: bad thing. We can't let it get back to the

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Speaker 1: way it was back in the bad old days. It's

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Speaker 1: worth asking the question to have central banks become too successful.

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Speaker 1: Is inflation too low or is something fundamentally changed about

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Speaker 1: the nature of the global economy. Pretty much everywhere among

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Speaker 1: the major economies, inflations either not existent or it's considered

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Speaker 1: too The euroSign is a great example of that. Uh Japan,

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Speaker 1: where they might just about have kicked that deflation habit,

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Speaker 1: but they certainly don't have inflation that is sustainable at

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Speaker 1: the rate at which they want. We have an awesome

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Speaker 1: economic surveys team here at Bloomberg and they've actually asked

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Speaker 1: economists what they think global inflation will look like for

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Speaker 1: the year, and according to that economists are looking for

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Speaker 1: a three percent rate of global inflation, which would actually

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Speaker 1: mark the slowest pace since two thousand nine, which, as

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Speaker 1: we know, was right there around her in the aftermath

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Speaker 1: of the global economic and financial crisis. That is an

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Speaker 1: average right, that is not country has right exactly. Well.

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Speaker 1: To get to the bottom of this, we have Bloomberg's

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Speaker 1: own in house economists with us, Carl Kazanna. He is

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Speaker 1: in New York with our producer Magnus in studio. Hey, Carl, Carl,

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Speaker 1: I think some people will hear this and think, gosh,

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Speaker 1: if my rent and my morning coffee and my beautiful

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Speaker 1: carbon fiber frame bikes aren't getting as expensive as we

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Speaker 1: thought they would, or if they're even getting cheaper, that's

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Speaker 1: a pretty amazing thing. We all like get when things

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Speaker 1: stay cheap, So why are they wrong to be happy

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Speaker 1: about these ultra slow price increases. Well, the issue is

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Speaker 1: that their mortgages and auto loans are also what not

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Speaker 1: being inflated away. So from a buias perspective, it seems

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Speaker 1: like a good idea that consumer prices are falling. But

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Speaker 1: often as prices fall or or run at a very

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Speaker 1: slow level, that means that wages also remained at a

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Speaker 1: low level, and that's certainly been a hallmark of this

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Speaker 1: economic cycle is a stagnant pace of wage inflation, even

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Speaker 1: as we get closer and closer to estimates of full

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Speaker 1: employment or the neutral rate of unemployment in the economy,

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Speaker 1: which is probably somewhere around five percent. We're getting closer

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Speaker 1: and closer to that number, and the wage pressure simply

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Speaker 1: aren't showing up. Now, that's from the buyer's perspective, but

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Speaker 1: also from the borrower's perspective. As I highlighted, it's a

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Speaker 1: big benefit. If you imagine a thirty year mortgage and

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Speaker 1: every year the inflation rate is two or three percent,

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Speaker 1: that's significantly reducing the payment terms of that mortgage over

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Speaker 1: the life of the loan. The same thing for an

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Speaker 1: auto loan, although that's of a shorter period of time,

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Speaker 1: or also for student loans. And it's even worse when

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Speaker 1: you have outright deflation, right when prices are actually declining.

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Speaker 1: Especially that that's the worst case because now you have

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Speaker 1: a situation where debt levels are not becoming more manageable,

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Speaker 1: but they're becoming even less manageable because deflation often feeds

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Speaker 1: into u wage deflation as well. Uh, And then that

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Speaker 1: means we have unsustainable debt levels in the economy at

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Speaker 1: the consumer level and also elsewhere in the economy as well. Yeah,

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Speaker 1: I think Chair Yelling actually use a similar example in

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Speaker 1: her speech last week when she talked about you know,

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Speaker 1: if a couple buys a house um and they expect

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Speaker 1: home prices to keep rising, and you have this phenomenon

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Speaker 1: where deflation feeds in the home prices, and the home

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Speaker 1: prices fall, and their wages are also following. All of

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Speaker 1: a sudden, their debt burn has gotten a lot bigger

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Speaker 1: and a lot harder to manage. The debt burden increases,

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Speaker 1: and also buying intentions are impacted. So with and this

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Speaker 1: certainly was a phenomenon we saw in the economy over

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Speaker 1: the last five to ten years. If you know prices

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Speaker 1: are falling, you're going to hold off on that purchase.

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Speaker 1: So in the housing market, we saw lots of fence

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Speaker 1: sitters watching the market decline, and they were waiting until

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Speaker 1: there was evidence of stability to jump in. Now, if

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Speaker 1: everyone in the economy starts sitting on the sidelines, waiting

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Speaker 1: to pull the trigger on big ticket purchases like housing,

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Speaker 1: like autos, like other categories, then that means there's a

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Speaker 1: real slowdown and consumer spending, which, as we know, consumer

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Speaker 1: spending is a significant share of the economy. About the

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Speaker 1: labor market has been strengthening for the better part of

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Speaker 1: fine of vs and the unemployment right historically speaking, is

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Speaker 1: very low. People keep waiting for that to translate into

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Speaker 1: a wage of surge or at least some sort of

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Speaker 1: discernible increase. It's not happening. What gives well, inflation is

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Speaker 1: a lagging indicator, and wage inflation is also a lagging

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Speaker 1: economic indicators. So there's a lot of slack in the

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Speaker 1: labor force due to the dislocation of the labor market

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Speaker 1: that occurred during the economic crisis, and also due to globalization.

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Speaker 1: There's now much more competition for wages across the globe

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Speaker 1: war as before, you know, the US had a relatively

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Speaker 1: insulated economy, So we are moving in the direction that

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Speaker 1: The good news is that the raises coming um. The

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Speaker 1: bad news is it's it's coming slower than in past

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Speaker 1: economic cycle. So as we move through full employment, there

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Speaker 1: will be increasing uh degrees of labor shortages and so

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Speaker 1: employers will have to pay higher wages. But we're just

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Speaker 1: not quite there yet. We need the economy growing at

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Speaker 1: a trend like pace or better. That means two percent

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Speaker 1: or or higher, and we need the unemployment rate to

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Speaker 1: break through five. When that happens, then I think we

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Speaker 1: will start to see the wage pressures. So Carl. I

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Speaker 1: grew up in Japan, which has been mired in chronic

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Speaker 1: deflation for the better part of the last two decades.

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Speaker 1: What precipitated it was the real estate boom that peaked

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Speaker 1: in the late nineteen eighties and deflated over the course

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Speaker 1: of the early to mid nine nineties. And the US

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Speaker 1: we had a similar real estate boom and bust that

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Speaker 1: led to the two financial crisis, as we all know.

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Speaker 1: You know, it sounds like you're pretty optimistic that we're

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Speaker 1: going to see two percent inflation in the fairly near future.

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Speaker 1: But are we permanently heading into a future with flore inflation?

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Speaker 1: What are your thoughts on that. It depends on your

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Speaker 1: definition of the very near future. I don't think we'll

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Speaker 1: see it by year end. I don't think we'll see

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Speaker 1: it next year. But in the grand scheme of things,

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Speaker 1: I think it's possible in or eighteen uh to return

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Speaker 1: back towards a trend like inflation rate. So we'll get

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Speaker 1: there as long as the economy continues to grow, we

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Speaker 1: don't stumble into a recession, and also as long as

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Speaker 1: policymakers don't make a mistake, and they could make a

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Speaker 1: mistake akin to the Japanese mistake, which was not having

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Speaker 1: policy loose enough for long enough. So the Japanese Central

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Speaker 1: Bank was too slow to respond uh to the negative

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Speaker 1: shock to their economy that transpired in the late nineteen

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Speaker 1: eighties early nineteen nineties. You know, a lot of economists

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Speaker 1: were saying, you have to do more in the Japanese

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Speaker 1: central Bank was slow to react, and this is the consequence. Right.

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Speaker 1: So the other week they said, had a huge interest

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Speaker 1: rate meeting, and they decided not to raise interest rates,

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Speaker 1: although we thought they might um by the way, our

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Speaker 1: magic eight ball in our episode the other week correctly

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Speaker 1: predicted this. And you know, one of the reasons why

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Speaker 1: Jenny Allen and her colleagues decided not to move was

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Speaker 1: to really make sure that they are entirely sure inflation

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Speaker 1: is going to come back to two fairly soon. Right.

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Speaker 1: It boils down to risk management and the FEDS looking

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Speaker 1: at the situation saying, what if we go a little

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Speaker 1: bit too late, what if we hold off in September,

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Speaker 1: But some September was really the time to go. Mind you,

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Speaker 1: As we look at the market reactions since that meeting,

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Speaker 1: I would argue the economy certainly was not ready for

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Speaker 1: higher interest rates. As we see equity markets falling, commodities

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Speaker 1: continuing to fall, this is still a very fragile economy. Nonetheless,

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Speaker 1: the FED is looking at the risk assessment and they're saying, well,

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Speaker 1: if we're a little too late to the game, what

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Speaker 1: options do we have? And they have plenty of options.

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Speaker 1: They can raise rates, they can raise rates faster, they

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Speaker 1: can telegraph to the market that they're going to be

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Speaker 1: more aggressive. They also have an inflated balance sheet with treasuries, mortgages,

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Speaker 1: and agency securities that they could start to unwind. So

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Speaker 1: there's an entire arsenal to combat an economy that's overheating

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Speaker 1: UH and inflation pressures that are building too much. But

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Speaker 1: that has hardly been the problem of of the U.

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Speaker 1: S economy or of any major economy over the last

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Speaker 1: five to ten years. Instead, the Feds looking at the

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Speaker 1: other side of the risk spectrum, and they're saying, what

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Speaker 1: if things get weaker, what if we make what if

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Speaker 1: we make a policy mistake and we go too soon

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Speaker 1: and we have to backtrack? What tools are at our

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Speaker 1: disposal UH? And those tools are not pleasant ones because

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Speaker 1: they're tools that have not been broadly tested, so they

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Speaker 1: could resort to negative interest rate policy, which was tested

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Speaker 1: in a relatively small economy like Sweden and seems to

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Speaker 1: be helping, but we haven't tried it among a major

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Speaker 1: financial player like the US, So there, you know, it's

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Speaker 1: not clear what the potential negative fallout could be. UH.

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Speaker 1: And also there's the UH the tool that the relatively

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Speaker 1: new tool of this cycle, which is quantitative easing, which

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Speaker 1: I would argue the first three rounds of a quantitative

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Speaker 1: easing have been effective, but we have no guarantee that

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Speaker 1: future rounds will be as effective as previous rounds. Well,

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Speaker 1: it's all very worrying stuff. UM, but I guess that's

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Speaker 1: it for us today. Maybe the next time you're in

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Speaker 1: a store you'll be even a little glad that you

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Speaker 1: see some price increases here and there. Thanks again for

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Speaker 1: listening to Bloomberg Benchmark. We will be back next week.

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Speaker 1: You can find us on Bloomberg dot com and on iTunes,

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Speaker 1: And while you're there, please please please take a moment

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Speaker 1: to rate and review our show that really really helps

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Speaker 1: others discover podcast and tell off what you thought of

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Speaker 1: the show. You can reach us and follow us on

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Speaker 1: Twitter at at Daniel Mark d c at Tori stillwell

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Speaker 1: and at a seven. All right, see you guys next time.

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Speaker 1: Past past best four