Latest / Stephanomics / The Global War on Inflation Is Far From Over

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The Global War on Inflation Is Far From Over · Stephanomics

0:03
Speaker 1: Hello, Stephanomics. Here the podcast that brings you the global economy.
0:07
Speaker 1: There are plenty of people in the Bloomberg newsroom who
0:09
Speaker 1: would tell you that one number matters more than any
0:12
Speaker 1: other in the global economy in three and that's US inflation.
0:17
Speaker 1: We got the latest print this week, and for at
0:19
Speaker 1: least a few hours, the conversation was of little else
0:22
Speaker 1: what it meant for interest rates, global markets, unemployment. But
0:26
Speaker 1: guess what, US inflation is not the only thing that matters.
0:30
Speaker 1: In fact, the event which might have the greatest impact
0:33
Speaker 1: on the global economy this year may already have happened,
0:36
Speaker 1: and that's Chinese President Seijingping's decision to reopen the Chinese
0:40
Speaker 1: economy almost overnight short term that has sent COVID infection
0:46
Speaker 1: rates soaring. It might even weaken the president's position, given
0:50
Speaker 1: how much he has invested in protecting the population from
0:52
Speaker 1: the virus. But if it leads to markedly faster Chinese
0:56
Speaker 1: growth in the second part of this year, we also
0:59
Speaker 1: know it will push up the price of raw materials
1:02
Speaker 1: and energy again and really complicate the job of cutting
1:05
Speaker 1: inflation in Europe and the US. Our chief global economist,
1:10
Speaker 1: Tom Marlick, has run the numbers on what exactly that
1:13
Speaker 1: might mean for the rest of us, So stick around
1:16
Speaker 1: to hear the results. We're also going to hear from
1:19
Speaker 1: the land of upside down Economics with a report and
1:22
Speaker 1: conversation about Turkey. But first, a quick postcard from Argentina,
1:28
Speaker 1: which had an inflation rate over the course of two
1:32
Speaker 1: of just under one. That's the highest rate in the
1:36
Speaker 1: G twenty group of economies, and it has plenty of
1:40
Speaker 1: awkward consequences for the economy and for Argentina's people, as
1:45
Speaker 1: our Economy and Government reporter Patrick Gillespie describes, for tourists,
1:49
Speaker 1: it's also made changing money quite an exercise. Yeah, I'm
1:56
Speaker 1: standing at the entrance of a Western Union branch and
2:00
Speaker 1: Central Buenos Aires, Argentina. The company provides a popular currency
2:04
Speaker 1: exchange service, and at twelve pm on a regular summer Thursday,
2:09
Speaker 1: the line is out the door. Inside the queue is
2:13
Speaker 1: like United Nations of buzzing tourists speaking German, French, Portuguese
2:18
Speaker 1: and English while they're waiting to exchange cash. It might
2:22
Speaker 1: look all normal until you take a peek into people's bags,
2:26
Speaker 1: from fanny packs to backpacks and big purses. Everyone here
2:30
Speaker 1: is walking out with loads of pacil bills in cash.
2:33
Speaker 1: The first time I did it kind of fels like
2:35
Speaker 1: I'm I'm rubbing a bank or so that was some
2:37
Speaker 1: weird When when do you have so much money in
2:40
Speaker 1: your hands? That was Stefan tavern If, twenty eight year
2:43
Speaker 1: old tourist from the Netherlands. He's fetching money to pay
2:47
Speaker 1: for his next flight with a pile of cash as
2:50
Speaker 1: thick as a brick. He's much more experienced now, but
2:53
Speaker 1: having so much cash on hand still leaves him a
2:56
Speaker 1: little unsettled. And the other thing based having so much
3:00
Speaker 1: so many notes right, Like, it's not it's basically thousand
3:03
Speaker 1: is the highest one you can get. And I just
3:06
Speaker 1: picked up, like what a couple hundred dollars and our
3:09
Speaker 1: euros and that's it's not just I love money, um
3:13
Speaker 1: just Argentina is a complex economy, with at least a
3:16
Speaker 1: dozen different exchange rates and a labyornth of currency controls.
3:21
Speaker 1: Those restrictions have created a growing gap between the official
3:24
Speaker 1: exchange rate and all of the other informal exchange rates.
3:28
Speaker 1: So if you go to a bank a t M
3:30
Speaker 1: in Buenos Aires, for example, one dollar would get you
3:33
Speaker 1: about a hundred and eighty paces at the official rate,
3:37
Speaker 1: but if you go to Western Union you get about
3:39
Speaker 1: three hundred and thirty five paces per dollar because the
3:43
Speaker 1: company offers a parallel exchange rate used in financial markets.
3:47
Speaker 1: That's nearly double the amount of money you get going
3:50
Speaker 1: through the traditional banking system. So how did the paco
3:56
Speaker 1: get here? Well, the answer is threefold. First, Argentina's inflation
4:05
Speaker 1: rate is nearing one of the highest in the world. Second,
4:10
Speaker 1: the government intentionally keeps the official exchange rate low to
4:14
Speaker 1: protect its razor thin currency reserves. This helps to prevent
4:19
Speaker 1: a major currency crisis and evaluation, which is something the
4:22
Speaker 1: government wants to avoid at all costs, at least until
4:26
Speaker 1: this year's presidential election in October. The last government that
4:29
Speaker 1: allowed a major run on the pace so got voted
4:32
Speaker 1: out after just one term in office. And finally, the
4:37
Speaker 1: largest cash bill in Argentina is only one thousand paso's
4:41
Speaker 1: worth about three dollars today. The government refuses to make
4:45
Speaker 1: larger denomination bills and says it wants to focus on
4:49
Speaker 1: digital payments, but critics say that's just an excuse. They
4:53
Speaker 1: argued that the central Bank doesn't want to print a
4:56
Speaker 1: larger denomination bill because it would be an admission that
4:59
Speaker 1: they failed to contain inflation. The peril of this currency
5:07
Speaker 1: crisis has made Argentina both a tourist haven and a
5:10
Speaker 1: laughing stock. At a football match last year, Brazilian fans
5:15
Speaker 1: tore up pays so cash bills to mock their Argentine
5:18
Speaker 1: opponents as their team cruise to victory, and a TikTok
5:22
Speaker 1: video went viral in which a Dutch influencer with the
5:26
Speaker 1: handle travel Tom Tom added insult to Argentina's injury. Hey, Europeans,
5:31
Speaker 1: when you think your inflation is bad, this is Argentina
5:35
Speaker 1: seventy inflation. This is the biggest bill in Argentina. It's
5:40
Speaker 1: one thousand vessels and they're worth it only three dollars.
5:45
Speaker 1: I'm so sorry Argentina. Of course, on the ground, it's
5:51
Speaker 1: anything but funny. The number of people living in poverty
5:54
Speaker 1: and Argentina spiked to nearly from just five years ago.
6:01
Speaker 1: A consulting firm called the Agnostico Politico counted about ten
6:05
Speaker 1: thousand protests in Argentina last year. That's the highest number
6:09
Speaker 1: in more than a decade. Inflation, galloping at such a
6:17
Speaker 1: fast pace has wiped out paychecks for middle class Argentine's
6:21
Speaker 1: Lucan Palabosino is a nurse working two jobs who had
6:25
Speaker 1: to move back in with her father so she could
6:28
Speaker 1: save money for her son. I can barely save money.
6:34
Speaker 1: It's hard. Everything is so expensive. A pair of shoes
6:39
Speaker 1: is forty paces, and those nurses the movement we make
6:42
Speaker 1: is a hundred and twenty thousand or a hundred and
6:44
Speaker 1: thirty thousand paces or a month, so a pair of
6:47
Speaker 1: shoes is half my salary. Looming over the horizon is
6:56
Speaker 1: this year's presidential election. A new press acident could lift
7:01
Speaker 1: all the currency controls so that there's no gap between
7:04
Speaker 1: exchange rates. Still, it's not clear the official paso rate
7:09
Speaker 1: will be getting stable anytime soon. Economists surveyed by Argentina's
7:14
Speaker 1: Central Bank see one dollar being worth six hundred and
7:17
Speaker 1: twenty four pesos by the end of two thousand four.
7:21
Speaker 1: That's versus the official rate now of a hundred and
7:24
Speaker 1: eighty pasos per dollar. Many believe a major currency devaluation
7:30
Speaker 1: is inevitable at some point, so no matter who wins
7:34
Speaker 1: the presidential race, you can still bet that cash will
7:37
Speaker 1: be king in Argentina and you will always find exchange
7:41
Speaker 1: houses shouting cambio or exchange on the streets of Buenos Aires.
7:50
Speaker 1: In Buenos Aires, I'm Patrick Gillespie for Bloomberg News. While
8:08
Speaker 1: I happen to know that quite a few economic students
8:11
Speaker 1: listen to this podcast, God help them. In fact, my
8:14
Speaker 1: teenage son has even been encouraged to listen, though he
8:16
Speaker 1: seems to have resisted so far. And if they take
8:19
Speaker 1: monetary policy one oh one, they'll be taught that if
8:22
Speaker 1: a country has a problem with inflation, it needs to
8:25
Speaker 1: raise interest rates increase the cost of money. Now the
8:29
Speaker 1: Argentine Central Bank has done that. I mean, it's true.
8:32
Speaker 1: With the presidential election coming up in October, the authorities
8:36
Speaker 1: are a bit less keen to raise rates. But the
8:39
Speaker 1: official interest rate is already at seventy. Now if we
8:43
Speaker 1: go to Turkey, inflations also in the high double digits there,
8:48
Speaker 1: but the official interest rate is only nine and the
8:52
Speaker 1: central bank has cut rates significantly in one and two.
8:58
Speaker 1: This reflects not the economics of textbooks, but the economics
9:02
Speaker 1: of President Argon. Central bank governors who have disagreed with
9:06
Speaker 1: this policy over the past few years haven't lasted very
9:09
Speaker 1: long in the job. Or Bloomberg's economist covering Turkey used
9:13
Speaker 1: to work at the central bank. In a minute, I'll
9:15
Speaker 1: ask her what it's like to be tearing up the
9:17
Speaker 1: rules of economic policy on a daily basis. But first
9:21
Speaker 1: a taste of what it's like to be in Turkey
9:23
Speaker 1: from our economy and government reporter Beryl Ackman, each other
9:32
Speaker 1: graduling inflation will below from now on. Therefore minimum wage
9:37
Speaker 1: phrases a number that will easily help people get by.
9:40
Speaker 1: We have solved inflation. That was a Turkish finance minister
9:44
Speaker 1: Nebati in an interior last week. He celebrated inflatitions downward
9:49
Speaker 1: trend and said as government had solved the fastest go
9:52
Speaker 1: out and prices in over two decades. Trouble is, inflation
9:57
Speaker 1: is still running around sixty Compare that to the U
10:01
Speaker 1: S and the EU, where consumers are grumbling about inflation
10:04
Speaker 1: that's in the high single digits. I am Billy Lackman,
10:09
Speaker 1: an economy reporter for Bloomberk based in Turkey, where basic
10:13
Speaker 1: kitchen stables like milk or eggs have become luxuries, and
10:17
Speaker 1: where prices have become so unanchored that it's hard to
10:20
Speaker 1: tell what's expensive anymore and what the normal prices. On
10:24
Speaker 1: a recent Sunday, I want to get coffee at the
10:27
Speaker 1: nearest Starbucks to my house in a Turkish capital, Anchara.
10:32
Speaker 1: Because authorizing electricity costs, we have stopped using a refrigerator.
10:36
Speaker 1: I will see a two thousand, three thousand bluer electors
10:39
Speaker 1: to bill every month. That is the voice of a
10:41
Speaker 1: flower shop merchant who has asked me to omit his
10:43
Speaker 1: name to avoid any trouble at his workplace or with authorities.
10:47
Speaker 1: He told me earlier that it is landlord increased. The
10:49
Speaker 1: workplace is read by almost two hundred percent. I chat
10:52
Speaker 1: a bit with him, and I comment that despite high inflation,
10:56
Speaker 1: it looks like business as usual on the outside. Cafes
10:59
Speaker 1: and restaurants are filled, Shopping malls are crowded. For many
11:02
Speaker 1: Turkey watchers, that is a strange part that life feels
11:05
Speaker 1: normal in many ways. Pointing at the coffee cop I'm holding,
11:10
Speaker 1: he tells me that people need to socialize and have fun.
11:12
Speaker 1: Inflation or not, They say, Starbucks are always crowded. What's
11:18
Speaker 1: the guy supposed to do? One would go crazy. It's
11:21
Speaker 1: a mortal world. Inflation is a problem pretty much everywhere
11:25
Speaker 1: around the globe, but Turkey had double digit inflation even
11:28
Speaker 1: before the war began. The situation in Ukraine just made
11:32
Speaker 1: things way worse economic orthodox He says that when inflation spikes,
11:37
Speaker 1: central banks should raise interest rates to cool the economy,
11:41
Speaker 1: reduced demand for goods and services and lower prices. But
11:46
Speaker 1: as other top bankers rushed through as their interest rates,
11:49
Speaker 1: Turkey did the opposite. From August through November last year,
11:53
Speaker 1: the Turkish Central Bank cut rates. The benchmark rate now
11:57
Speaker 1: stands at nine percent when that I stood for inflation,
12:01
Speaker 1: which is six. This makes Turkey have one of the
12:04
Speaker 1: deepest negative real rates, meaning money is extremely cheap. President
12:09
Speaker 1: rejeb Type Ardon, the country's long serving leader, has a
12:13
Speaker 1: big hand in Turkey's policy. FI is that the indictmate.
12:19
Speaker 1: I told you we would lower the interest rates to
12:21
Speaker 1: single digits, and we did. It will continue like this
12:24
Speaker 1: from now on. They say. Inflation is like this and
12:27
Speaker 1: that don't worry that too will fall. President Ardon is
12:32
Speaker 1: hardly alone and preferring to keep borrowing costs law. But
12:35
Speaker 1: the president argues that lower rates will bring down inflation.
12:39
Speaker 1: We have yet to see this theory validated in real life,
12:42
Speaker 1: and while most nations are trying to slow their economy
12:45
Speaker 1: is a bit too cool inflation. Ardn is boosting spending
12:48
Speaker 1: and raising pay for minimum wage earners. It's been dubbed
12:51
Speaker 1: the Turkey economy model and Who's killer will become one
12:58
Speaker 1: of the fastest glowing trees in the world. For now,
13:02
Speaker 1: Turkey citizens are hurting. Farouk, who owns a corner store
13:06
Speaker 1: in a quiet street near Anchor a central life square,
13:10
Speaker 1: says dairy has become unaffordable. Essential food items, for example,
13:18
Speaker 1: daily products have become incredibly expensive, extremely expensive. We compromise
13:22
Speaker 1: from ourselves. Our preferences have shifted and we tried to
13:26
Speaker 1: make some of them ourselves. Because the money we are
13:28
Speaker 1: and does not compensate for our purchasing power. We try
13:31
Speaker 1: to say more. Many economists think Turkey needs an urgent
13:38
Speaker 1: policy you turn, and that the current policy format is unsustainable.
13:43
Speaker 1: Turkey's elections are expected to take place in about five months,
13:47
Speaker 1: and that's why President Ardon is fixated on economic growth.
13:50
Speaker 1: But Ardon and his UG party are facing a serious
13:53
Speaker 1: challenge from a six party opposition alliance and growing discontent
13:57
Speaker 1: over high living costs. So it is is posed, I
14:00
Speaker 1: said to suggest Ardon has a high chance of getting
14:03
Speaker 1: re elected, but this party may see power. Turkey's finance
14:07
Speaker 1: Minister said the nation will keep its policy of low
14:10
Speaker 1: interest rates regardless of what happens in the election. Meantime,
14:13
Speaker 1: the Turkish people are desperate for something, anything, to ease
14:17
Speaker 1: the skyrocketing prices. Arton, who works at a stationary shop
14:21
Speaker 1: in Ankara, is struggling to provide for his family. We
14:26
Speaker 1: cannot get by work with minimum wage to look after
14:29
Speaker 1: two kids and look after the household pay round. It's impossible.
14:33
Speaker 1: What we are doing is just pretty I asked Arton
14:36
Speaker 1: what items he has the most trouble paying for. The
14:39
Speaker 1: list keeps growing. London's and said to them, first food,
14:45
Speaker 1: then clothing. Before we used to go out to dinner
14:48
Speaker 1: once or twice and long. Now it's maybe every six months,
14:51
Speaker 1: and it's even rare. I'm Berry Lackman for Bloomberg News. Yeah, so,
15:09
Speaker 1: as promised, we will dig into the upside down world
15:12
Speaker 1: of Turkish economic policies now and broaden things out to
15:15
Speaker 1: talk about what's going to happen to inflation everywhere. With
15:18
Speaker 1: Bloomberg's Turkey economist Selva Besiki joining from Anchora, and our
15:23
Speaker 1: chief global economist Tom Marlick, who's with me here this
15:26
Speaker 1: week in New York. Welcome both of you, Silva, thank
15:30
Speaker 1: you so much. You worked for several years at the
15:33
Speaker 1: Turkish Central Bank before we helped you to escape. We
15:37
Speaker 1: like to think, just sort of from a personal note,
15:39
Speaker 1: is it difficult for officials at the central bank to
15:44
Speaker 1: to stick with these unorthodox policies? Do you think? Yes?
15:47
Speaker 1: And no? There's still very good technocrats at the bank
15:50
Speaker 1: who produced analysis based on orthodox economic views, but the
15:54
Speaker 1: monetary policy committee caters to the demands of the political leadership.
15:58
Speaker 1: The law interest rate policy, of course comes at the
16:01
Speaker 1: cost of weeklyra and high inflation, and the bank has
16:05
Speaker 1: to resort to all these alternative tools to lessen the
16:08
Speaker 1: negative feedback on both. That only works partially and pushes
16:12
Speaker 1: the economy into over regulation. And I guess the question
16:15
Speaker 1: that lots of people ask is why there hasn't been
16:19
Speaker 1: a bigger crisis in Turkey with them following these policies
16:23
Speaker 1: now for several years. People, you know, things are tough
16:26
Speaker 1: in Turkey. I mean, we've we've heard that, but people
16:28
Speaker 1: have been expecting that to be a tipping point, a
16:33
Speaker 1: sort of moment of truth just doesn't seem to come. Yeah,
16:37
Speaker 1: especially when we think of the very high external financing
16:41
Speaker 1: needs of the economy. I'll just give you one number
16:43
Speaker 1: to illustrate. The external debt that is due within a
16:46
Speaker 1: year accounts for the fifth of GDP, and the resource
16:50
Speaker 1: coverage of this death is less than six So, as
16:53
Speaker 1: you said, what is stopping this crisis from coming? Two things.
16:58
Speaker 1: The central Bank has been in travening ah installed interventions
17:03
Speaker 1: into currency markets, which we calculate to be at around
17:08
Speaker 1: a hundred billion US dollars generated through October last year.
17:13
Speaker 1: This in itself, of course, as the fragilities and takes
17:15
Speaker 1: the net reserves into even deeper negatives. There's also a
17:19
Speaker 1: second point, is this money flows, the mystery money flows
17:23
Speaker 1: into the country under net errors and emissions. Now these
17:27
Speaker 1: are flows that normally would be small statistical discrepancies under
17:32
Speaker 1: the balance of payments, but for Turkey they are at
17:35
Speaker 1: twenty two billion U S dollars. In other words, they
17:39
Speaker 1: financed about half all of the current account deficit. Um.
17:43
Speaker 1: The central Bank thinks it's currency influence from deposits accounts
17:47
Speaker 1: held abroad. A more likely explanation, however, is offered even
17:51
Speaker 1: by the Minister of Finance. Actually, um cash flows from Russia.
17:56
Speaker 1: So just to sort of pick that a little bit,
17:58
Speaker 1: the reason why you'd expect Turkey to have a crisis
18:01
Speaker 1: is it's dependent on borrowing from the rest of the
18:04
Speaker 1: world to cover the gap in its external balance, and
18:09
Speaker 1: the central bank has been sort of propping up the currency,
18:13
Speaker 1: spending lots of foreign reserves on doing that, and despite
18:19
Speaker 1: and it doesn't have enough of those reserves. But somehow
18:22
Speaker 1: there's some sort of secret money coming into the country
18:25
Speaker 1: which makes the numbers add up. Is that broadly what's happened. Yeah,
18:29
Speaker 1: so the secret money coming in is definitely you know,
18:32
Speaker 1: most of it is uh cash flows from Russia. There's
18:36
Speaker 1: this other factor to consider them. The central banks reserves
18:39
Speaker 1: are in negatives, so how do they even intervene? Very
18:43
Speaker 1: very valid point um. The central bank has enhanced its
18:46
Speaker 1: sources of reserves since the beginning of last year. They
18:50
Speaker 1: are now tapping into um foreign currency revenues of exporters.
18:55
Speaker 1: You have to convert of your revenues through the central
18:58
Speaker 1: bank and give the all the effects to the bank.
19:01
Speaker 1: So the sort of creative bookkeeping and also a lot
19:04
Speaker 1: of into sort of forcing the hands of exporters and
19:08
Speaker 1: taking some of the money they're earning abroad. They're lucky
19:10
Speaker 1: in a sense that You've got quite a lot of
19:12
Speaker 1: Russians who are looking to shelter money from sanctions. Absolutely,
19:17
Speaker 1: and there's also the other factors. For a couple of
19:21
Speaker 1: years now, the real estate market has been quite um
19:26
Speaker 1: vibrant with foreign investors coming in, and that has been
19:31
Speaker 1: one major area for the Russians to come and claim
19:35
Speaker 1: residency here um and perhaps even apply for citizenship through
19:40
Speaker 1: property requirement. UM. It used to be that Turkey's southern neighbors,
19:46
Speaker 1: so Iran and Iraq nationals used to spare head the
19:50
Speaker 1: number one investors in the property market, but since the
19:55
Speaker 1: conflict in or the war in Ukraine, now that number
19:59
Speaker 1: one position is held by Russians. And you have a
20:02
Speaker 1: very distinguished career as an economist, and I guess we
20:05
Speaker 1: wouldn't have expected to be talking about mystery flows and
20:08
Speaker 1: the geopolitics of money coming in from Russia. I mean,
20:11
Speaker 1: there's an economist sitting in Turkey. You know what, what
20:16
Speaker 1: do you think is going to happen? Do you think
20:18
Speaker 1: there'll be a reversal in these policies after the election
20:22
Speaker 1: this year? So, I mean, for the economic students who
20:26
Speaker 1: are listening, we know that fighting inflation, um, the interest
20:30
Speaker 1: rate is the main course, and all the other policies
20:32
Speaker 1: are just side dishes without the anchor from the policy rate.
20:35
Speaker 1: There's only so much we can expect from these alternative
20:38
Speaker 1: tools that the central bank currently seems to be resorting too.
20:41
Speaker 1: So yeah, even that's so called Turkey economy model was
20:46
Speaker 1: supposed to boost the economy on four goals UM investments,
20:51
Speaker 1: high exports, currents to councer plus and UH strongerly round
20:57
Speaker 1: lower inflation. It has failed on all four of these
21:01
Speaker 1: goals in the year that it's been it's been applied.
21:04
Speaker 1: The central branks reserves are below standard safety levels. There
21:08
Speaker 1: seems to be room for interventions until May this year. Um.
21:12
Speaker 1: That is probably one of the reasons why the current
21:15
Speaker 1: political leadership is considering pulling up elections from June to May.
21:20
Speaker 1: After that, policymakers could either continue on this road with
21:25
Speaker 1: capital restrictions or they will have to do a policy versal.
21:29
Speaker 1: As you say, we see the second option as a
21:31
Speaker 1: more likely outcome at the moment, regardless of the outcome
21:34
Speaker 1: of the elections. And just briefly, I mean, what do
21:37
Speaker 1: you think the economy is going to look like in
21:39
Speaker 1: a few years time. What's the long term impact of
21:43
Speaker 1: this period of unorthodox policy going to be well, whoever
21:48
Speaker 1: is going to be in charge of the economic situation
21:50
Speaker 1: has the type time ahead. Um, it's a really tight
21:54
Speaker 1: rope walking kind of situation. UM. As you said, Turkey,
21:58
Speaker 1: isn't that energy important usually run as a current account deficit,
22:03
Speaker 1: So getting put forward investness is really going to be
22:06
Speaker 1: critical and that requires a little bit of more long
22:09
Speaker 1: term looking rebuilding the institutional terror, which is really going
22:15
Speaker 1: to take a long time. Silva, Thank you so much,
22:18
Speaker 1: Tom Marlick. Just broadening this out, We've had two pieces
22:23
Speaker 1: from countries that have got pretty much the worst of
22:27
Speaker 1: the global inflation problem at the moment, Argentina and Turkey. UM.
22:31
Speaker 1: Closer to home US Europe, inflation does seem to be
22:36
Speaker 1: coming down, but of course a critical question is how
22:38
Speaker 1: fast does it come down and where does that leave
22:41
Speaker 1: policies for central banks and interest rates next year. What
22:45
Speaker 1: are you currently thinking so globally, Stephanie, We think inflation
22:50
Speaker 1: peaked around ten percent in the third quarter of two,
22:55
Speaker 1: and by the end of three we think he will
22:58
Speaker 1: have come down to around five The sun. Now, of course,
23:01
Speaker 1: that global average is being skewed up by some of
23:05
Speaker 1: the countries. You've just been discussing countries like Turkey and Argentina,
23:09
Speaker 1: which don't account for a big share of the global economy,
23:12
Speaker 1: but where inflation is just so sky high that it's
23:15
Speaker 1: dragging up the global averages. If you take those out
23:19
Speaker 1: of the picture and focused on the big advanced economies
23:22
Speaker 1: United States, the Euro Area, you've got inflation which peaked
23:26
Speaker 1: at a slightly lower level, and it's going to come
23:29
Speaker 1: down a little bit more over the course of um. Now,
23:35
Speaker 1: why is inflation going to come down? Two big forces
23:38
Speaker 1: of work. Firstly, goods prices. During the pandemic, we had
23:44
Speaker 1: supply chain snarls and we had stimulus driven demand, and
23:48
Speaker 1: both of those things supercharge demand for goods, pushing good
23:52
Speaker 1: prices higher. That is now unwinding. Secondly, energy, of course,
23:57
Speaker 1: the big story in Rush as invasion of Ukraine and
24:01
Speaker 1: all that meant for energy prices. Energy prices rocketed higher
24:05
Speaker 1: in now they've come a long way down from their peak.
24:10
Speaker 1: Why is an inflation falling further? Well, the story there
24:14
Speaker 1: is really a story about labor markets which are very tight,
24:17
Speaker 1: wages which are rising very quickly, and so service prices
24:21
Speaker 1: which are sticky, and it's that combination of falling goods prices,
24:26
Speaker 1: energy prices, but service prices which are staying persistently high,
24:31
Speaker 1: which mean inflation is going to come down quite a
24:33
Speaker 1: lot over the course of but still at least in
24:37
Speaker 1: the United States, stay above the comfort zone of the
24:40
Speaker 1: Central Bank. And I started the program by sort of
24:42
Speaker 1: giving a hint of some of the research that you've
24:44
Speaker 1: just brought out with the team about how china reopening
24:49
Speaker 1: could change this picture, because it could quite significantly change
24:54
Speaker 1: the outlook for global commodity prices. And then I guess
24:56
Speaker 1: that complicates the story for inflation more generally. Yeah, that's right.
25:01
Speaker 1: So UM in two thousand and eight, two thousand and nine,
25:07
Speaker 1: in the global financial crisis, and the problem for the
25:10
Speaker 1: world was weak growth, and China road to the rescue
25:14
Speaker 1: with an enormous stimulus boosting global demand. In the problem
25:21
Speaker 1: for the world was high inflation, and China, in a
25:24
Speaker 1: strange sort of way, helped out again, but this time
25:28
Speaker 1: by not running a stimulus. Indeed, China's COVID zero policies,
25:34
Speaker 1: which kept China's supply chains China's factories open but crimped
25:38
Speaker 1: Chinese demand, probably contributed to lessening global inflation in the
25:43
Speaker 1: year just past now in the year ahead, China is reopening,
25:49
Speaker 1: and that raises the risk that China's economy is going
25:52
Speaker 1: to come roaring back, good news for China's one point
25:55
Speaker 1: four billion citizens, but potentially adding an additional impetus to
26:00
Speaker 1: global inflation. Now we've done the calculations, we've looked at
26:05
Speaker 1: the relationship between Chinese growth, commodity prices, and global inflation,
26:11
Speaker 1: and our best estimate and it really is an estimate
26:15
Speaker 1: at this point because there's just so much uncertainty about
26:17
Speaker 1: how China is reopening is going to play out. But
26:20
Speaker 1: our best estimate is that China is going to accelerate
26:24
Speaker 1: from around three percent growth in to above five growth
26:29
Speaker 1: in and that's going to add close to a percentage
26:33
Speaker 1: point to global inflation. And if you saw even faster growth,
26:36
Speaker 1: I mean, things have been moving on the ground so
26:38
Speaker 1: much faster than anyone expected in terms of the reopening.
26:41
Speaker 1: I mean, of course, that has that means soaring infection
26:44
Speaker 1: rates in the short run and potentially some supply chain
26:46
Speaker 1: issues in the short run. As we know, we can
26:48
Speaker 1: see that factories and us sometimes are taking measures to
26:53
Speaker 1: try and get control of the virus themselves. But assuming
26:58
Speaker 1: that infections um work their course through the economy. Could
27:04
Speaker 1: we see faster growth than the five percent you've just
27:06
Speaker 1: talked about, and what would that mean for inflation? Yeah,
27:08
Speaker 1: I think you're absolutely right, Stephanie. I mean the picture
27:11
Speaker 1: in China is not just going to be a boom right. Indeed,
27:17
Speaker 1: the end and the start of are probably going to
27:21
Speaker 1: be really weak for Chinese growth, precisely because COVID infections
27:27
Speaker 1: are sweeping the country and so people are self isolating,
27:31
Speaker 1: They're staying at home to try and stay healthy. The rebound,
27:35
Speaker 1: we think comes towards the end of the first quarter
27:38
Speaker 1: and really picks up the pace heading into the second quarter.
27:42
Speaker 1: I could that rebound be even stronger. Could we be
27:45
Speaker 1: looking at Chinese growth not of five plus something this year,
27:49
Speaker 1: but perhaps six percent plus something this year? I think
27:52
Speaker 1: absolutely yes. The end of COVID zero is a significant
27:57
Speaker 1: one off boost. We're also seeing Chinese as he makers
28:01
Speaker 1: reverse course on their property policy, allowing a bit more demand,
28:06
Speaker 1: a little more bit more finance to come into the
28:08
Speaker 1: all important property sector. We're seeing them ease back on
28:12
Speaker 1: their regulatory crackdown on private sector entrepreneurs. We're seeing them
28:18
Speaker 1: promised to do a bit more in terms of fiscal stimulus.
28:21
Speaker 1: All of these things together could well add an additional
28:24
Speaker 1: impetus to China's growth, And if we see China's growth
28:29
Speaker 1: moved from that five percent handle to that six percent handle,
28:32
Speaker 1: then the impetus for global inflation will be that much higher.
28:36
Speaker 1: Now we're looking at the start of the year. We've
28:38
Speaker 1: also got the World Economic Forum coming up next week.
28:42
Speaker 1: This is the kind of the time of year where
28:43
Speaker 1: you have endless things. Certainly if you're me coming into
28:46
Speaker 1: your inbox with forecasts about what's going to happen in
28:48
Speaker 1: the markets where you should be putting your investments. Luckily,
28:51
Speaker 1: neither of us get paid according to whether we can
28:53
Speaker 1: predict what will happen to equities or bonds, thank goodness.
28:57
Speaker 1: But a lot of those debates about what kind of
28:59
Speaker 1: year this is going to be in financial markets come
29:01
Speaker 1: down to what kind of year it's going to be
29:04
Speaker 1: for inflation, and whether you know, at the end of
29:07
Speaker 1: three inflation is basically under control, or whether we find
29:12
Speaker 1: actually we've got at least another year of tough work
29:16
Speaker 1: against inflation still to go. Where do you stand on that?
29:20
Speaker 1: Do you think that this is going to be a
29:21
Speaker 1: bit tougher than people are expecting this job of bringing
29:25
Speaker 1: inflation down, or do you think that, you know, broadly,
29:28
Speaker 1: by the end of this year will be done. So
29:30
Speaker 1: it's a really interesting question, Stephanie. For the last couple
29:34
Speaker 1: of years, the big mistake economists have made is in
29:39
Speaker 1: failing to predict how high and how persistently high inflation
29:44
Speaker 1: would be. I think we've got an exciting new opportunity. Um,
29:49
Speaker 1: we've got an opportunity to be wrong in both directions.
29:53
Speaker 1: So it's entirely possible that US labor markets will stay
29:58
Speaker 1: hot and wages will continue to rise quickly, and inflation
30:04
Speaker 1: will certainly come down from that ten percent level too
30:07
Speaker 1: much lower level, but it will stay sticky, much higher
30:11
Speaker 1: than the Fed and other big central banks are comfortable with.
30:15
Speaker 1: It's also possible that the tightening which the Fed and
30:19
Speaker 1: others have injected into the system over the course of
30:21
Speaker 1: two is going to start kicking in and we're going
30:25
Speaker 1: to see economies weakening much more quickly. We've got a
30:29
Speaker 1: recession penciled in for the United States in the second half,
30:34
Speaker 1: and if that happens, you've got the goods price deflation,
30:37
Speaker 1: you've got the energy price deflation, and you've got less
30:41
Speaker 1: pressure from wages. If that happens, perhaps inflation disappears as
30:47
Speaker 1: quickly as it appeared. Masterful fence sitting there from our
30:51
Speaker 1: chief economist, Tom Wallick. Tom, thank you so much. And
30:53
Speaker 1: Selvaski in Anchora, thank you. That's it for Stephanomics, and
31:05
Speaker 1: we will be in Davos next week for the World
31:07
Speaker 1: Economic Forum, so look out for some special material coming
31:11
Speaker 1: from down the mountain. In the meantime, please rate us
31:14
Speaker 1: wherever you get this podcast, and check out the Bloomberg
31:16
Speaker 1: News website for more economic news and views on the
31:19
Speaker 1: global economy. You should also be following at economics on Twitter.
31:25
Speaker 1: This episode was produced by Yang Yang, Summer Sadi and
31:28
Speaker 1: Magnus Henrickson, with special thanks to Patrick Gillespie, Carolina Milan,
31:33
Speaker 1: Beryl Ackman, Borhan Yokas, Selva Baja Baziki, and Tom Warlick.
31:40
Speaker 1: Mike Sasso is the executive producer of Stephanomics.