Latest / Stephanomics / What’s Really Behind the Great 2021 Inflation Debate

Transcript

What’s Really Behind the Great 2021 Inflation Debate · Stephanomics

• 0:00
  Speaker 1: Well, John, this is the inflation that you're looking for,
• 0:03
  Speaker 1: and it comes in harder than anticipated. CPI up eight
• 0:07
  Speaker 1: tenths of eight percent. That pushes the year over year
• 0:10
  Speaker 1: CPI to four point two percent. Let's take a look
• 0:13
  Speaker 1: at the core rate up nine tenths of a percent.
• 0:17
  Speaker 1: There's the one that's gonna worry Wall Street. It's three
• 0:19
  Speaker 1: times the amount in March, and on a year over
• 0:22
  Speaker 1: your basis, we're up to Hello, and welcome to Stephanomics,
• 0:29
  Speaker 1: the podcast that brings the global economy to you. If
• 0:32
  Speaker 1: you're under forty five listening to this in America, Europe
• 0:35
  Speaker 1: or Japan, it's a fair bet you've never given much
• 0:38
  Speaker 1: thought to inflation. The price of some things like a
• 0:41
  Speaker 1: college education, has gone up a lot in your lifetime,
• 0:44
  Speaker 1: but by and large, the price of things we buy
• 0:46
  Speaker 1: every day has been fairly stable, even gone down. In fact,
• 0:50
  Speaker 1: it is deflation falling prices that's more often kept policymakers
• 0:54
  Speaker 1: up at night, not the kind of double digit inflation
• 0:58
  Speaker 1: rates we saw in the nineteen seventies. But is that
• 1:01
  Speaker 1: all about to change? Well that's the fear that started
• 1:04
  Speaker 1: to rattle financial markets this week, especially after that unexpectedly
• 1:09
  Speaker 1: high April inflation number came through in the US. That
• 1:12
  Speaker 1: headline annual rate of four point two percent that you
• 1:15
  Speaker 1: just heard about is the highest since two thousand and nine.
• 1:19
  Speaker 1: It's also been seized on by Joe Biden's political opponents,
• 1:22
  Speaker 1: who put it together with recent disappointingly weak jobs growth
• 1:27
  Speaker 1: and say his spending plans are going to bring on
• 1:30
  Speaker 1: seventies style stag inflation. Doesn't help that drivers in parts
• 1:35
  Speaker 1: of the US have been reminded of that era this
• 1:37
  Speaker 1: week waiting in long lines for a tank of gas
• 1:41
  Speaker 1: thanks to a cyber attack on a big fuel pipeline.
• 1:44
  Speaker 1: Now we'll get the full story on that in a
• 1:46
  Speaker 1: minute from Bloomberg Energy supremo Javier Blasts. I'm also going
• 1:51
  Speaker 1: to talk to a Wall Street economist with his own
• 1:53
  Speaker 1: take on the great inflation debate. But first we go
• 1:57
  Speaker 1: to Chief Asia Economy correspondent and occurrent in Hong Kong
• 2:01
  Speaker 1: to find out where at least some of this inflation
• 2:04
  Speaker 1: pressure has been coming from. US Exporters are crying foul
• 2:18
  Speaker 1: as the price of shipping containers spikes are Semiconductors are
• 2:23
  Speaker 1: the brains that power technology, and right now there is
• 2:26
  Speaker 1: a message shortage of those brains. This is now day four,
• 2:29
  Speaker 1: one of the world's largest container ships, completely bringing traffic
• 2:33
  Speaker 1: in the Suez Canal to a standstill. It's hard to
• 2:36
  Speaker 1: imagine China's factories have spent months absorbing shocks from soaring
• 2:40
  Speaker 1: prices for shipping containers under raw materials, a scramble for
• 2:44
  Speaker 1: semi conductors, and even the blockage of the Suez Canal. Now,
• 2:50
  Speaker 1: manufacturers in the world's biggest trading nation are under pressure
• 2:54
  Speaker 1: to pass on these charges to their overseas customers, potentially
• 2:58
  Speaker 1: adding to global inflation pressu years Briant Chan is president
• 3:02
  Speaker 1: of Windward Corporation Limited and among the manufacturers grappling with
• 3:07
  Speaker 1: the price surge. I went to visit his officers in
• 3:10
  Speaker 1: Hong Kong to hear what's happening. One has been very
• 3:15
  Speaker 1: challenging year and this time around. You know, we are
• 3:18
  Speaker 1: seeing increases in pretty much everything that we we we
• 3:22
  Speaker 1: purchase the plastic resin, We're seeing increases in electronic components, packaging,
• 3:30
  Speaker 1: metal parts, so pretty much, you know, everything that it's
• 3:34
  Speaker 1: needed to to you know, go into the manufacturing of
• 3:37
  Speaker 1: a product. Manufacturers in China are well used to volatile
• 3:41
  Speaker 1: price wings, but this time, they say the breath of
• 3:45
  Speaker 1: cost increases is unusual, So I'm just going to use
• 3:48
  Speaker 1: sort of a random product. It's more like a consumer product.
• 3:52
  Speaker 1: This is a camera that a hunter will will typically
• 3:55
  Speaker 1: use to track the motions of animals in the wild,
• 3:59
  Speaker 1: so you know, to help them when they go hunting.
• 4:02
  Speaker 1: The electronics components make up about the cameras costs and
• 4:07
  Speaker 1: have risen roughly ten Other components, such as the packaging,
• 4:11
  Speaker 1: make up over tenth of total costs, and those have
• 4:14
  Speaker 1: also risen about ten percent in price. So when we
• 4:17
  Speaker 1: factor in all the different categories of material and the
• 4:22
  Speaker 1: respective increases, this comes in out of US increasing costs
• 4:26
  Speaker 1: for US. The big unknown is how long these higher
• 4:32
  Speaker 1: costs will last. The optimistic view is that the supply
• 4:36
  Speaker 1: chain blockages caused by COVID nineteen disruption might just smooth out.
• 4:41
  Speaker 1: Manufacturers say they're looking for workarounds and cost savings to
• 4:45
  Speaker 1: limit the need to pass on costs. Christopher Say is
• 4:48
  Speaker 1: chief executive officer of Musical Electronics Limited, which makes products
• 4:52
  Speaker 1: such as Bluetooth speakers and high powered home stereos for
• 4:55
  Speaker 1: the US market. We have two ways to do it.
• 4:58
  Speaker 1: First of all, you used to do the re engineering
• 5:01
  Speaker 1: trying to save some courses from the re engineering. And
• 5:05
  Speaker 1: the second is how to do it in a better way.
• 5:08
  Speaker 1: That means how it can be more efficiency in production,
• 5:13
  Speaker 1: so that may save some money. But he also says
• 5:15
  Speaker 1: the pressures are real. He cites, for example, a shortage
• 5:18
  Speaker 1: of integrated circuits, which are crucial components for electronics. It
• 5:23
  Speaker 1: can be raised up from a year ago, let's say
• 5:27
  Speaker 1: ten dara to twenty dollars to even fairly or folly dollars,
• 5:32
  Speaker 1: so the difference could be very big and healed. Not
• 5:36
  Speaker 1: only that, also the delivery the time is much longer
• 5:39
  Speaker 1: than what we are expecting. Uh, it's very difficult. We
• 5:44
  Speaker 1: have to inform the customer that for the current business
• 5:48
  Speaker 1: that we have taken the orders, we have no choice.
• 5:50
  Speaker 1: Will uh just manufacturing according to the price that we
• 5:55
  Speaker 1: have come, that we have a creed. But a year later,
• 5:59
  Speaker 1: on nine months later, a sthority that we have to
• 6:02
  Speaker 1: increase our past all our increase the courses to our customers.
• 6:09
  Speaker 1: Chang Chu, Bloomberg Economics Chief Asia Economists, says the soaring
• 6:13
  Speaker 1: producer price index in China is only one part of
• 6:17
  Speaker 1: a global jigsaw. My sense is at this point China's
• 6:22
  Speaker 1: PPR development is part of the global story rather than
• 6:26
  Speaker 1: being the single factor driving it, and that several things
• 6:29
  Speaker 1: going on for the global producer prices um Clearly there's
• 6:34
  Speaker 1: a search in demand. Economies are coming back, they are
• 6:38
  Speaker 1: opening up, the global manufacturing sector is booming. I also
• 6:44
  Speaker 1: spoke to Ding Chuang, he's chief economist for Greater China
• 6:48
  Speaker 1: and North Asia at Standard Chartered. His research shows a
• 6:51
  Speaker 1: correlation between China's producer prices and the US consumer inflation,
• 6:56
  Speaker 1: so we may see PPR inflation at seven percent handle
• 7:00
  Speaker 1: around in the middle of the year. We cannot conclude
• 7:04
  Speaker 1: for sure that China's PPI increase causes higher CPI inflation
• 7:09
  Speaker 1: in the US and the rest of the rest of
• 7:12
  Speaker 1: the world, but there is anecdotal evidence that the Chinese
• 7:16
  Speaker 1: exporters have gained pricing power recently. And he says where
• 7:21
  Speaker 1: China goes, the world follows because the fact that China
• 7:24
  Speaker 1: recovered faster than the rest of the world inflation indicating
• 7:29
  Speaker 1: in China may have a leading role in predicting inflation
• 7:34
  Speaker 1: in the rest of the world. However it plays out,
• 7:38
  Speaker 1: the last few months have been pretty volatile for China's
• 7:41
  Speaker 1: manufacturers and few expect a circuit breaker anytime soon. When
• 7:45
  Speaker 1: woods chance, he's higher prices as inevitable. But in the
• 7:48
  Speaker 1: situation where increases are across a range of different categories
• 7:53
  Speaker 1: and at a very steep rate, it's certainly not something
• 7:57
  Speaker 1: that a manufacturer is able to bear. You know a well,
• 8:07
  Speaker 1: talking of supply bottlenecks and the potential for inflation, you
• 8:10
  Speaker 1: might remember I spoke to Bloomberg's chief energy correspondent, Heavier Blasts,
• 8:14
  Speaker 1: earlier in the year when that big ship got stuck
• 8:17
  Speaker 1: in the Panama Canal. We talked then about the key
• 8:20
  Speaker 1: bits of US infrastructure which could really hurt if they
• 8:24
  Speaker 1: got interrupted. Somewhat unnervingly, one of them, the country's biggest
• 8:28
  Speaker 1: petroleum pipeline, has just been hit by a massive cyber attack,
• 8:32
  Speaker 1: raising fears that gas stations all over the US could
• 8:35
  Speaker 1: start to run dry. Have you just tell us quickly?
• 8:39
  Speaker 1: I guess you know what happened and why is this
• 8:41
  Speaker 1: pipeline so important? The Colonial Pipeline is the most important
• 8:46
  Speaker 1: oil products by a line in the United States. It
• 8:49
  Speaker 1: transports gasoline, diesel, and get fuel from the US Gulf
• 8:54
  Speaker 1: of Mexico Coast, where most of the refiners in the
• 8:57
  Speaker 1: US are located into the cities and big suburbs of
• 9:03
  Speaker 1: the East cause of the United States. So everything from
• 9:06
  Speaker 1: think about Atlanta all the way up to New York
• 9:10
  Speaker 1: and and be John and and it transport about two
• 9:13
  Speaker 1: point five million barrels a day of refined products. Used
• 9:16
  Speaker 1: to put that in context, that's more than the old
• 9:19
  Speaker 1: the oil demand of Germany, just in one single pipeline.
• 9:24
  Speaker 1: And what happened is that the pipeline company called Colonial
• 9:27
  Speaker 1: got hacked on a cyber attack on Friday, and since
• 9:31
  Speaker 1: then the pipeline has been shut down and UM refined
• 9:36
  Speaker 1: products are beginning to run quite shortly in the United States.
• 9:39
  Speaker 1: So that means that that means gas stations, petrol stations
• 9:42
  Speaker 1: up and down the country actually finding they're running out
• 9:44
  Speaker 1: of petrol. Yes, and and there are two concerns here.
• 9:48
  Speaker 1: One is that obviously those gasoline UM those fuel stations
• 9:53
  Speaker 1: are not getting the supply as regularly as they used
• 9:56
  Speaker 1: to uh, and they're draining down their stocks. But all so,
• 10:00
  Speaker 1: because many citizens are hearing the news about the hack,
• 10:03
  Speaker 1: the first thing that they're they're they're doing is well,
• 10:07
  Speaker 1: I should just put more gasoline on my car. They're
• 10:09
  Speaker 1: going into the gas stations, and there's a bit of
• 10:12
  Speaker 1: panic buying and that is accelerating the demands. Who is
• 10:15
  Speaker 1: making the things a bit worse? So when's it going
• 10:17
  Speaker 1: to be fixed? While Colonial has said that they're hoping
• 10:21
  Speaker 1: to restore substantially all services by the end of the week,
• 10:27
  Speaker 1: but they're not telling much to their customers, the big
• 10:30
  Speaker 1: oil companies, the big gas station companies and um and
• 10:34
  Speaker 1: and the consign is that this maybe go a bit longer.
• 10:38
  Speaker 1: It's also not very clear whether Colonial really have a
• 10:42
  Speaker 1: plan to restore everything. At the moment, they have been
• 10:45
  Speaker 1: able to restore service on a very small portion of
• 10:48
  Speaker 1: the pipeline, and they're doing it manually rather than using
• 10:51
  Speaker 1: any technology and anything automatic. And then when people listening
• 10:55
  Speaker 1: to this, it could be that it will have been
• 10:57
  Speaker 1: it will have been resolved, but of course it's still
• 10:59
  Speaker 1: raise questions. Is about longer term how well prepared this
• 11:04
  Speaker 1: pipeline other key bits of infrastructure are against this kind
• 11:08
  Speaker 1: of attack. Yes, and and Colonial is not unique. I mean,
• 11:12
  Speaker 1: it's a very large pipeline, but around the world there
• 11:15
  Speaker 1: are similar key pieces of infrastructure that we take for
• 11:20
  Speaker 1: granted to transport crude oil, refined products, sometimes natural gas,
• 11:26
  Speaker 1: or the electricity in network agreed, and the fact that
• 11:29
  Speaker 1: Colonial was suffered this cyber attack and it was in
• 11:34
  Speaker 1: a way easy to shut down completely. The whole pipeline
• 11:39
  Speaker 1: is really getting a lot of people in the oil
• 11:41
  Speaker 1: industry and the wider energy industry very consigned because they
• 11:44
  Speaker 1: think that it is possible that happened to Colonial, it
• 11:47
  Speaker 1: may be possible in other pieces of key infrastructure. Do
• 11:51
  Speaker 1: we think they've paid ransom? Is that going to be
• 11:53
  Speaker 1: part of the solution. Well, certainly they have been attacked
• 11:57
  Speaker 1: by a ransomware that they are being asked to pay.
• 12:00
  Speaker 1: It's on some money, um. And interestingly, the United States
• 12:04
  Speaker 1: government is saying publicly that they are not advising one
• 12:07
  Speaker 1: way or the other to the company, which I suppose
• 12:10
  Speaker 1: that it means that at some point perhaps Colonial will pay,
• 12:14
  Speaker 1: so they're not. So it is interesting they're not saying
• 12:16
  Speaker 1: what they would normally do when people, when people get
• 12:19
  Speaker 1: taking hostage, that you that you mustn't given. Is this
• 12:22
  Speaker 1: by far the biggest attack on this kind of critical
• 12:24
  Speaker 1: infrastructure that we've seen? Has there been Have there been
• 12:27
  Speaker 1: other attacks in other countries. It's certainly the biggest attack
• 12:31
  Speaker 1: of this kind that we have seen in the United States.
• 12:34
  Speaker 1: We have seen attacks to the electricity network and developing countries,
• 12:39
  Speaker 1: and we saw a couple of very big and prominent
• 12:42
  Speaker 1: attacks in Saudi Arabia against Saudia Arangko and another petrochemical company,
• 12:47
  Speaker 1: but that they didn't affect production, but they really affected
• 12:51
  Speaker 1: lots of computers in in in offices and and and
• 12:55
  Speaker 1: more kind of the back and and and middle office
• 12:58
  Speaker 1: of those companies. So certainly the this is UH, this
• 13:01
  Speaker 1: is an escalation, but this is not the first time
• 13:04
  Speaker 1: that we have seen UH cyber criminals targetting the energy infrastructure.
• 13:09
  Speaker 1: I guess finally, we're obviously thinking in this program about inflation,
• 13:15
  Speaker 1: long term risk of or possibility that inflation is really
• 13:20
  Speaker 1: coming back. Should we expect gas prices to rise as
• 13:24
  Speaker 1: a result of this? You think there's gonna be any
• 13:26
  Speaker 1: lasting effect. We have seen already UM an increasing casual
• 13:31
  Speaker 1: in prices, retail prices in the United States on average
• 13:35
  Speaker 1: in the country heat on Tuesday at six and a
• 13:39
  Speaker 1: half year high of almost three dollar per gallon, and
• 13:43
  Speaker 1: we probably we're going to see sustain sustained prices for
• 13:46
  Speaker 1: the next few days until the situation is resolved. Beyond that,
• 13:50
  Speaker 1: it's a bit of a question mark. But with with
• 13:53
  Speaker 1: the U S economy opening up and more people hitting
• 13:56
  Speaker 1: the roads, probably we're going to continue to see pressure
• 13:59
  Speaker 1: on on gasual prices, and I will not be surprising
• 14:02
  Speaker 1: we see three aspergallon um for most of the of
• 14:06
  Speaker 1: the of the salmony in the US that that will
• 14:09
  Speaker 1: be the highest prices that US drivers have phase since
• 14:12
  Speaker 1: two thousand and fourteen, and in many other parts of
• 14:15
  Speaker 1: the world, certainly in Europe, that would be such a bargain.
• 14:19
  Speaker 1: Have your blast, Thank you very much, as ever my pleasure.
• 14:30
  Speaker 1: Now on Stephanomics, we tend to talk often to academic
• 14:33
  Speaker 1: economists and policy makers about the trends shaping the global economy,
• 14:38
  Speaker 1: but of course anyone investing long term in businesses in
• 14:42
  Speaker 1: the US and around the world also has to have
• 14:44
  Speaker 1: a view on much of that, which is why I
• 14:46
  Speaker 1: thought we'd check in with Jason Thomas, the head of
• 14:49
  Speaker 1: global research at the Carlisle Group, the US based investment company,
• 14:54
  Speaker 1: and Jason, we're going to talk about the very long term.
• 14:58
  Speaker 1: But what's your what's your response to the this week's
• 15:00
  Speaker 1: inflation news was it? Was it as dramatic as all that? Well,
• 15:04
  Speaker 1: I think this is something that that we anticipated there
• 15:07
  Speaker 1: there's two effects at work. Number one, base effects, when
• 15:11
  Speaker 1: when you look at April one, you're measured relative to
• 15:15
  Speaker 1: a lockdown economy twelve months ago, So so you over
• 15:19
  Speaker 1: your inflation is going to be higher as a consequence
• 15:21
  Speaker 1: of that. Secondly, there is genuine inflationary pressure, and it's
• 15:26
  Speaker 1: related to shortages and under production of durable goods in
• 15:32
  Speaker 1: relative to demand for for many of those products, and
• 15:35
  Speaker 1: so this is ongoing. I think that the shortages persist,
• 15:39
  Speaker 1: the price pressures persist, and I think that we're going
• 15:42
  Speaker 1: to see in months ahead inflation somewhat above the FEDS
• 15:46
  Speaker 1: two percent target. But if there's if there's a relative
• 15:50
  Speaker 1: shortage of things that people want to buy, shouldn't we
• 15:53
  Speaker 1: worry about that getting a lot worse when the economy
• 15:56
  Speaker 1: starts to reopens. No, you know it really interestingly, reopening
• 16:01
  Speaker 1: it is not the problem. In fact, it's the solution.
• 16:05
  Speaker 1: So I think the more that one studies the origin
• 16:08
  Speaker 1: of this inflationary pressure, the more comfortable here she is
• 16:12
  Speaker 1: that it's ultimately transitory in nature. And the reason I
• 16:16
  Speaker 1: say that is when we look back at you had
• 16:19
  Speaker 1: a very big decline in the production of durable goods
• 16:24
  Speaker 1: and manufacturing and essentially manufacturers they locked down initially for
• 16:29
  Speaker 1: for public health reasons, of course, but we're very slow
• 16:33
  Speaker 1: to scale back production because many of them feared that
• 16:37
  Speaker 1: the pandemic was going to be essentially a replay of
• 16:40
  Speaker 1: the global financial crisis, where there was a sudden stop
• 16:44
  Speaker 1: of economic activity, huge plunge in sales of durable goods.
• 16:49
  Speaker 1: But interestingly, as it turned out, it was almost the
• 16:52
  Speaker 1: exact opposite, because after that initial decline in demand in
• 16:57
  Speaker 1: March April into May, we found that households actually because
• 17:02
  Speaker 1: they they're spending on travel, tourism, live of events, was
• 17:09
  Speaker 1: so depressed and in fact so pressed by by social
• 17:12
  Speaker 1: distancing and public health regulations that they actually that that
• 17:18
  Speaker 1: savings really financed the boom endurable goods. So you had
• 17:22
  Speaker 1: a new and used car sales that were up seventeen percent.
• 17:25
  Speaker 1: You have things like motorcycle sales up thirty eight percent
• 17:29
  Speaker 1: relative to the pandemic. We had hot tub sales up
• 17:32
  Speaker 1: by a comparable magnitude, appliances, furniture, So so it's really
• 17:37
  Speaker 1: this interaction where you had a big decline in the
• 17:40
  Speaker 1: output and capacity. Because business managers manufacturers are really risk
• 17:44
  Speaker 1: averse concerned about the outlook at the same time that
• 17:49
  Speaker 1: that you had a boom in the household sector, so reopening.
• 17:54
  Speaker 1: What that means is that household spending is going to normalize.
• 17:58
  Speaker 1: So you're you're very likely to see on declines in
• 18:01
  Speaker 1: purchases of things like hot tubs or or home renovations
• 18:05
  Speaker 1: or motorcycle sales. There's more money goes towards theater tickets, airfares,
• 18:12
  Speaker 1: hotel stays, etcetera. So so I think that you're going
• 18:15
  Speaker 1: to have a moderation and spending at the same time
• 18:18
  Speaker 1: that capacity and output rises back to two pre pandemic levels,
• 18:23
  Speaker 1: and by the fall of this year, perhaps into the winter,
• 18:26
  Speaker 1: you'll have a moderation and some of these price trends.
• 18:29
  Speaker 1: E certainly sympathize with that as someone who spent much
• 18:31
  Speaker 1: more on on tents and outdoor fire pits in the
• 18:35
  Speaker 1: last few months than I might have anticipated spending. One
• 18:39
  Speaker 1: thing that clearly has some of President Biden's opponents quite
• 18:44
  Speaker 1: fired up is the idea that you know, you've got
• 18:47
  Speaker 1: this potential for for inflation and then several trillion dollars
• 18:52
  Speaker 1: of additional spending coming down the track. Kind of fiscal
• 18:55
  Speaker 1: spending that we've not seen in a long time. Um,
• 18:59
  Speaker 1: is is that something that we should worry about as
• 19:02
  Speaker 1: something that will give us inflation? Well, I think that
• 19:06
  Speaker 1: what's been passed so far, uh, there was one point
• 19:09
  Speaker 1: nine trillion dollar stimulus, uh, and that the the estimates
• 19:13
  Speaker 1: suggests that about one point one trillion of that, about
• 19:16
  Speaker 1: five almost five and a half percent of g d
• 19:18
  Speaker 1: p H is going to be injected into the economy
• 19:21
  Speaker 1: in this year one. But really the bulk of it
• 19:25
  Speaker 1: has already come and gone. In that it was the
• 19:29
  Speaker 1: stimulus payments that hit bank accounts starting in March fourteen
• 19:33
  Speaker 1: into into April with some of the physical checks and
• 19:36
  Speaker 1: then the ongoing unemployment insurance benefits. But but that's not
• 19:41
  Speaker 1: something that I expect to be sustained, you know. I
• 19:43
  Speaker 1: think it's a it's a one time that the money arrives,
• 19:46
  Speaker 1: it's it's spent. So so I'm not not terribly worried
• 19:49
  Speaker 1: there now. If there's ongoing spending, If if we have
• 19:53
  Speaker 1: additional programs that are that are enacted where whether the
• 19:56
  Speaker 1: spending you know, can can reach very high levels at
• 19:59
  Speaker 1: some point, there is there's reason to suspect that that
• 20:03
  Speaker 1: we could have sustained aggregate demand at outstrips that have
• 20:08
  Speaker 1: the ability to supply to to adjust. But but we're
• 20:11
  Speaker 1: certainly not close to mean there yet, and I suspect
• 20:15
  Speaker 1: that that most of the spending that's contemplated going forward
• 20:19
  Speaker 1: is going to be very unlike in that it's going
• 20:23
  Speaker 1: to be phased over a tenure window so as to
• 20:26
  Speaker 1: make that risk less likely. We have been mainly talking
• 20:29
  Speaker 1: about the next year or two, but when you think
• 20:32
  Speaker 1: about the next sort of five, ten, twenty years, are
• 20:37
  Speaker 1: you thinking that this is going to going to continue
• 20:40
  Speaker 1: to be like the last ten or twenty years, and
• 20:44
  Speaker 1: that inflation has just not really been the issue that
• 20:47
  Speaker 1: we've been mainly worried more about. If anything, deflation, falling prices,
• 20:51
  Speaker 1: and rising prices are used when you look ahead, do
• 20:53
  Speaker 1: you think that the future is gonna look fairly like
• 20:57
  Speaker 1: that or do you think there is potentially a more
• 20:59
  Speaker 1: long term change underway. You know that I would say
• 21:04
  Speaker 1: the biggest change, or one of the biggest changes in
• 21:07
  Speaker 1: global macroeconomics over the past twenty years, has been the
• 21:11
  Speaker 1: way that we interpret the Japanese situation. Twenty years ago,
• 21:17
  Speaker 1: Japan was viewed as sui generous, that this was a
• 21:20
  Speaker 1: specific context and it was very specific to two Japanese institutions, cultures,
• 21:26
  Speaker 1: some of some of the frictions that exist, the fact
• 21:29
  Speaker 1: that they had, the fact they had falling prices. It
• 21:31
  Speaker 1: was like a Japan and an inability the central bank
• 21:34
  Speaker 1: to stimulate demand. Uh, it just seemed that they were
• 21:38
  Speaker 1: they had this this conundrum that that seemed again to
• 21:42
  Speaker 1: be very specific to Japan, that the effect of a
• 21:46
  Speaker 1: negative demand shock would would be too following wages in
• 21:49
  Speaker 1: the way that that created a very specific psychology that
• 21:53
  Speaker 1: that is ultimately disinflationary and in fact deflationary. But today
• 21:58
  Speaker 1: I think that lobal macroeconomics is now open to the
• 22:02
  Speaker 1: possibility and in fact many people believe that that rather
• 22:06
  Speaker 1: than specific to Japan, Japan was really just the vanguard,
• 22:11
  Speaker 1: the first economy to experience what other advanced economies are
• 22:16
  Speaker 1: are now getting a taste of in differing degrees, certainly
• 22:19
  Speaker 1: the Eurozone far more than than the United States thus far.
• 22:23
  Speaker 1: You also have technology, and technology has a very profound
• 22:27
  Speaker 1: disinflationary effect in two ways. First, the data transmission, data storage,
• 22:34
  Speaker 1: communications technology prices really declined very steadily each year, and
• 22:39
  Speaker 1: as that accounts for a larger share of the capital inputs.
• 22:44
  Speaker 1: You essentially have a situation where a hundred dollars of
• 22:46
  Speaker 1: current cash flow buys you a hundred and twelve dollars
• 22:50
  Speaker 1: of capital equipment. So so that increases businesses cash flow
• 22:55
  Speaker 1: and and also business savings while also having the disinflationary
• 23:00
  Speaker 1: on the price of their goods and services. Secondly, technology
• 23:05
  Speaker 1: is allowed for the emergence of digital platforms. Businesses that
• 23:09
  Speaker 1: are in many ways infinitely scalable. That is to say
• 23:12
  Speaker 1: that they can increase revenues with little to know in
• 23:17
  Speaker 1: incremental investment, little to know incremental hiring, and and those
• 23:22
  Speaker 1: sorts of businesses really are now the largest businesses in
• 23:26
  Speaker 1: the US economy by market capitalization, and they're quite different today.
• 23:31
  Speaker 1: They generate cash from operations that make cases is for
• 23:35
  Speaker 1: to six times the amount of money that they reinvest
• 23:38
  Speaker 1: in the business after accounting for for R and B
• 23:41
  Speaker 1: and other current expenditures. That that's quite different than the
• 23:45
  Speaker 1: largest from the largest businesses in our economy UH forty
• 23:50
  Speaker 1: years ago, which are largely industrial conglomerates that when they
• 23:54
  Speaker 1: reached pathy, they had to go to financial moral UH
• 24:00
  Speaker 1: to get the the money necessary to build new plants
• 24:03
  Speaker 1: by new equipment scale up capacity, when when they reach capacity,
• 24:07
  Speaker 1: they had to raise wages so as to bid labor
• 24:10
  Speaker 1: away from competitors or actually businesses and other industries. These
• 24:15
  Speaker 1: are profound structural changes to the economy that I think
• 24:20
  Speaker 1: are overwhelmingly disinflationary, and I don't see any reason to
• 24:23
  Speaker 1: suspect that that they're going to reverse anytime soon. It's
• 24:27
  Speaker 1: interesting that you say that, and elviously, it chimes with
• 24:29
  Speaker 1: some of the discussion we had in UM last week's podcast,
• 24:33
  Speaker 1: because we were looking at this sort of changing global
• 24:36
  Speaker 1: corporate landscape and what the the biggest fifty companies in
• 24:40
  Speaker 1: the world now relative to UH and how much less
• 24:45
  Speaker 1: capital intensive they were, and many of the things that
• 24:47
  Speaker 1: you've just been been saying. There are those though, who
• 24:50
  Speaker 1: would point to some of those trends, but also the
• 24:54
  Speaker 1: very the disinflationary impact that China, for example, has had
• 24:57
  Speaker 1: over the last twenty or thirty years and say, actually,
• 25:00
  Speaker 1: those things are going into reverse. We've heard about it
• 25:03
  Speaker 1: in Asia on this program, but you know, not just
• 25:06
  Speaker 1: short term, but wages going up in some of these
• 25:09
  Speaker 1: low cost production company countries, UM labor shortages appearing in
• 25:14
  Speaker 1: the US, but also at at a global level, just
• 25:18
  Speaker 1: to push back a bit. You know, you underestimating that.
• 25:21
  Speaker 1: I mean, yes, all the things that you said have
• 25:22
  Speaker 1: been true, but are they going to be a bit
• 25:24
  Speaker 1: less true in the future. China was a major contributor
• 25:30
  Speaker 1: to the disinflation and advanced economies over the past twenty
• 25:34
  Speaker 1: five years. That that is undeniable. But but I think
• 25:37
  Speaker 1: it's that it doesn't necessarily imply that rising wages in
• 25:42
  Speaker 1: China or the demographic issues in China will necessarily lead
• 25:46
  Speaker 1: to higher in prices or higher structural inflation going forward.
• 25:51
  Speaker 1: And I think that that's the key fallacy among many
• 25:54
  Speaker 1: who are propounding this argument, which is to say that
• 25:57
  Speaker 1: they as as Chinese wages rise, as the demographic shortfall
• 26:03
  Speaker 1: starts to create a shortage of workers in China, the
• 26:06
  Speaker 1: the advanced economy trend, inflation rates are going to rise
• 26:10
  Speaker 1: as a result as there's worker shortage. The reason I
• 26:12
  Speaker 1: think that this is not true is because when you
• 26:15
  Speaker 1: look at the trade offs among manufacturers today, it's very
• 26:20
  Speaker 1: often labor intensive manufacturing processes in emerging market economies where
• 26:27
  Speaker 1: the wage rates are relatively low relative to automate, automation intensive,
• 26:34
  Speaker 1: robotic intensive manufacturing processes and advanced economies and you see
• 26:39
  Speaker 1: that when you look at robot intensity robots per capita,
• 26:43
  Speaker 1: very often it is in those high wage economies that
• 26:46
  Speaker 1: are having demographic shortfalls. Of course, East Asia, UH, Japan,
• 26:52
  Speaker 1: Korea at Germany also with with higher higher robots per capita.
• 26:57
  Speaker 1: So you know, going forward, I think that this demographic
• 27:01
  Speaker 1: shortfall is and this shortage of workers is going to
• 27:05
  Speaker 1: to really increase the capital intensity of some of these
• 27:09
  Speaker 1: manufacturing processes, and rather than upward pressure on on inflation,
• 27:15
  Speaker 1: it's actually just going to accelerate some of these trends
• 27:18
  Speaker 1: that that were witnessing. I guess the final question would
• 27:23
  Speaker 1: be what all this means for wages? I mean, the
• 27:27
  Speaker 1: other for many you know that the positive side of
• 27:30
  Speaker 1: inflation fears is wage hopes that they might finally get
• 27:33
  Speaker 1: a pay rise. So what's the what's the implication of
• 27:36
  Speaker 1: what you're saying for wages in the USA? What I
• 27:40
  Speaker 1: think longer term, the FED is trying to do is
• 27:43
  Speaker 1: to not choke off recoveries and expansions just as real
• 27:48
  Speaker 1: wages are finally growing and and so you know, when
• 27:50
  Speaker 1: when the FED took a look back on the last
• 27:53
  Speaker 1: ten years, they decided that policy wasn't too accommodative. As
• 27:57
  Speaker 1: many analysts feared policy he was actually too tight, and
• 28:02
  Speaker 1: they looked at the current framework and implemented over the
• 28:05
  Speaker 1: last decade, there would have been far fewer rate hikes.
• 28:10
  Speaker 1: Maybe really in that nineteen period there would have probably
• 28:16
  Speaker 1: been one third as many rate hikes as they actually implemented.
• 28:21
  Speaker 1: So if the FED takes this more patient accommodative approach,
• 28:25
  Speaker 1: that as the the payroll employment reaches and then exceeds
• 28:30
  Speaker 1: pre pandemic levels, that will actually start to see some
• 28:33
  Speaker 1: sustained wage gains. But in general, I do think that
• 28:37
  Speaker 1: more macro models and more macro economists are really trying
• 28:42
  Speaker 1: to take account labor heterogen eighty and realizing that aggregates
• 28:48
  Speaker 1: or averages as it relates to wages are really not
• 28:51
  Speaker 1: telling the story. And I think that that's also why
• 28:55
  Speaker 1: the FED has become much more focused on equitable and
• 28:58
  Speaker 1: inclusive growth, because we don't want you very high returns
• 29:03
  Speaker 1: on human capital or skilled labor to in any way
• 29:06
  Speaker 1: um disguise what it could be languishing wages in other
• 29:10
  Speaker 1: segments of the market. Well, that is a very important
• 29:13
  Speaker 1: note to end on, and it certainly is that it
• 29:15
  Speaker 1: is the lesson of a lot possibly of the last
• 29:17
  Speaker 1: twenty or thirty years, that the averages can look a
• 29:20
  Speaker 1: lot better than what's going on beneath the surface. Jason Thomas,
• 29:24
  Speaker 1: thank you very much. Thank you for having me. Now,
• 29:32
  Speaker 1: if you're interested in hearing exactly the opposite take on
• 29:35
  Speaker 1: what's going to happen to inflation, you should flick back
• 29:38
  Speaker 1: in your Stephanomics archives. I know you have them to
• 29:41
  Speaker 1: November last year, my interview with Charles Goodheart and Manage Pradam.
• 29:46
  Speaker 1: They literally wrote the book on the subject. Now that
• 29:49
  Speaker 1: is it for this episode of Stephanomics. I'll be back
• 29:51
  Speaker 1: next week with a lot more from around the world.
• 29:54
  Speaker 1: In the meantime, please rate the program. Thank you, and
• 29:58
  Speaker 1: should you feel the need, you can always get more
• 29:59
  Speaker 1: new us an analysis from Bloomberg Economics by following at
• 30:02
  Speaker 1: Economics on Twitter. This episode was produced by Magnus Hendrickson,
• 30:06
  Speaker 1: with special thanks to Jason Thomas and Brittany Berliner at
• 30:10
  Speaker 1: the Carlisle Group, Javier Blast and Ender Current. The head
• 30:14
  Speaker 1: of bloombow podcast is Francesco Levy and this was Lucy
• 30:17
  Speaker 1: meekins last week as the executive producer of Stephanomics, so
• 30:21
  Speaker 1: thank you to her for all her hard work, and
• 30:24
  Speaker 1: good luck, Lucy with your new job on Bloomberg. Di