Bloomberg Audio Studios, Podcasts, radio News.

Bloomberg Audio Studios, Podcasts, radio News.

I'm Stephen Carroll, and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. Central bankers have good reason to celebrate. They've managed to bring inflation in the world's major economies down close to their target, but they're remaining cautious. It's often been said that the last mile may be the hardest, and this is where we are now. When you're in a dark room, you have to be very careful in order to try to avoid making a mistake. Ultimately, we want to get inflation back down to our two percent target.

I'm Stephen Carroll, and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. Central bankers have good reason to celebrate. They've managed to bring inflation in the world's major economies down close to their target, but they're remaining cautious. It's often been said that the last mile may be the hardest, and this is where we are now. When you're in a dark room, you have to be very careful in order to try to avoid making a mistake. Ultimately, we want to get inflation back down to our two percent target.

We're not aiming to undershoot it, and so we do have to make.

We're not aiming to undershoot it, and so we do have to make.

Some judgments about what is the path ahead for inflation in Europe and in the US. Inflation has been slowing for most of this year, but that trend is getting bumpy, and all of a sudden, it's less clear it'll go from here. So here's why inflation could be a bigger problem in twenty twenty five. Bloomberg Opinion Columbus Daniel Mass joins me now for more. Daniel, first of all, can we say that the twenty twenty two inflation crisis is behind us.

Some judgments about what is the path ahead for inflation in Europe and in the US. Inflation has been slowing for most of this year, but that trend is getting bumpy, and all of a sudden, it's less clear it'll go from here. So here's why inflation could be a bigger problem in twenty twenty five. Bloomberg Opinion Columbus Daniel Mass joins me now for more. Daniel, first of all, can we say that the twenty twenty two inflation crisis is behind us.

Yes, well, and truly if you look at the central bank that is first among equals. The FED has a target of two percent inflation, an average of two percent over time, according to an indicator called PCEE. Okay, So in twenty twenty two, around the middle of that year, PCEE was above seven. Okay, So you know, we've come down a very significant way. And that is the same in many jurisdictions that we watch. The differences where they do exist alive nuance are set. Aside China, second largest economy, it's in a slightly different basket. China has the opposite problem it's been wrestling with for a while, which is that inflation is too low. So China's operating on a different cycle. But in most of the developed markets and in quite a few of the emerging markets, inflation, as manifested by the kind of language we used a couple of years ago, is yesterday's problem.

Yes, well, and truly if you look at the central bank that is first among equals. The FED has a target of two percent inflation, an average of two percent over time, according to an indicator called PCEE. Okay, So in twenty twenty two, around the middle of that year, PCEE was above seven. Okay, So you know, we've come down a very significant way. And that is the same in many jurisdictions that we watch. The differences where they do exist alive nuance are set. Aside China, second largest economy, it's in a slightly different basket. China has the opposite problem it's been wrestling with for a while, which is that inflation is too low. So China's operating on a different cycle. But in most of the developed markets and in quite a few of the emerging markets, inflation, as manifested by the kind of language we used a couple of years ago, is yesterday's problem.

So we are well down the hill from the peak of inflation. But there is a bit of steckiness appearing in some places. What elements could prove troublesome.

So we are well down the hill from the peak of inflation. But there is a bit of steckiness appearing in some places. What elements could prove troublesome.

Look, it's not that people are suddenly seeing a surge, you know, a return to twenty twenty two situation. The governor of the Reserve Bank of New Zealand, fresh from a fifty basis point cut the second in as many meetings, was asked this question. He's like, no, no way. He foresees nirvana. As a matter of fact. Now, you know, one needs to be careful not to extrapolate too much. But they were the world's first inflation targeting central bank, and get a lot of cutos. It's part of the monetary folklore of the post nineteen forty five era. So look, this promising situation of inflation tamed of mission, pretty much accomplished, but don't shout it too loudly. What's caused elements of doubt to appear in that scenario, and that has been the election and Donald Trump's foreshadowing of a muscular to put it mildly, fiscal policy, deregulation and also tariffs. Now these things are all seen as strengthening the dollar and if anything, certainly putting a flaw under disinflation and possibly pushing inflation up a little bit. But we'll see. So I think a fascinating question that we're going to be wrestling with over the next few years. Is was the inflation surge of twenty twenty one, twenty twenty two, and part of twenty twenty three, you know, a blip and we go back to where we were with low inflation. Janet Yellen's famous mystery comment or was that at the start of something new where inflation is constrained from its high levels but can't drop back to the levels that it enjoyed before the pandemic. So the election sort of, you know, injected an element of doubt in this. You know, goldilocks could still happen, okay, but before we taste the porridge, you know, there might be a few interesting little hiccups along the way.

Look, it's not that people are suddenly seeing a surge, you know, a return to twenty twenty two situation. The governor of the Reserve Bank of New Zealand, fresh from a fifty basis point cut the second in as many meetings, was asked this question. He's like, no, no way. He foresees nirvana. As a matter of fact. Now, you know, one needs to be careful not to extrapolate too much. But they were the world's first inflation targeting central bank, and get a lot of cutos. It's part of the monetary folklore of the post nineteen forty five era. So look, this promising situation of inflation tamed of mission, pretty much accomplished, but don't shout it too loudly. What's caused elements of doubt to appear in that scenario, and that has been the election and Donald Trump's foreshadowing of a muscular to put it mildly, fiscal policy, deregulation and also tariffs. Now these things are all seen as strengthening the dollar and if anything, certainly putting a flaw under disinflation and possibly pushing inflation up a little bit. But we'll see. So I think a fascinating question that we're going to be wrestling with over the next few years. Is was the inflation surge of twenty twenty one, twenty twenty two, and part of twenty twenty three, you know, a blip and we go back to where we were with low inflation. Janet Yellen's famous mystery comment or was that at the start of something new where inflation is constrained from its high levels but can't drop back to the levels that it enjoyed before the pandemic. So the election sort of, you know, injected an element of doubt in this. You know, goldilocks could still happen, okay, but before we taste the porridge, you know, there might be a few interesting little hiccups along the way.

What scale of heckups should we expecting or perhaps considering given some of those elements you laid out, things like tariffs if you're in the US that could have pushed up prices there, or the strong dollar that could have an effect outside of the US. Are we talking about inflation could bump back up to three presentesh or could we be thinking about it potentially going higher than that?

What scale of heckups should we expecting or perhaps considering given some of those elements you laid out, things like tariffs if you're in the US that could have pushed up prices there, or the strong dollar that could have an effect outside of the US. Are we talking about inflation could bump back up to three presentesh or could we be thinking about it potentially going higher than that?

Depends what measure you're talking about. So core PCE is quite a bit higher than two point one. It's around two point seven two point eight. Do I foresee it going to something like four? No, JP Morgan. Economists were discussing this on a recent podcast. I know you're a fan of podcasts, so I raised this. They were talking about whether there would be a New Testament FED or an Old Testament fed, you know, an unforgiving FED or a forgiving FED. Work. You can be more or less okay with PCE between two and three, but beyond that you start to worry. You know, the International Monetary Fund gets mixed reviews. It's fair to say they have done a lot of work on their economic forecasting, and according to the chief economists of the IMF, this is almost mission accomplished in terms of inflation. And it's been accomplished without a global risk. Go back to the dark days of twenty twenty two, there was a fairly common idea around that it was going to take a recession to ring this post COVID inflation out of the system. Well, that hasn't happened. We do need to be prepared to question consensus. I think we should also question, in terms of tariffs, what actually becomes law and for how long so Trump is foreshadowed higher tariffs on Mexico. I don't think they're allowed under USMCA, which was the revised and after which he called the best agreement ever. So is he now saying it's not the best agreement ever? Let's wait and see what actually happens.

Depends what measure you're talking about. So core PCE is quite a bit higher than two point one. It's around two point seven two point eight. Do I foresee it going to something like four? No, JP Morgan. Economists were discussing this on a recent podcast. I know you're a fan of podcasts, so I raised this. They were talking about whether there would be a New Testament FED or an Old Testament fed, you know, an unforgiving FED or a forgiving FED. Work. You can be more or less okay with PCE between two and three, but beyond that you start to worry. You know, the International Monetary Fund gets mixed reviews. It's fair to say they have done a lot of work on their economic forecasting, and according to the chief economists of the IMF, this is almost mission accomplished in terms of inflation. And it's been accomplished without a global risk. Go back to the dark days of twenty twenty two, there was a fairly common idea around that it was going to take a recession to ring this post COVID inflation out of the system. Well, that hasn't happened. We do need to be prepared to question consensus. I think we should also question, in terms of tariffs, what actually becomes law and for how long so Trump is foreshadowed higher tariffs on Mexico. I don't think they're allowed under USMCA, which was the revised and after which he called the best agreement ever. So is he now saying it's not the best agreement ever? Let's wait and see what actually happens.

Do central bankers need to be thinking about, perhaps, if not, a new playbook for this sort of era, maybe adding a few seats at the back to decide how they handle something like.

Do central bankers need to be thinking about, perhaps, if not, a new playbook for this sort of era, maybe adding a few seats at the back to decide how they handle something like.

This new playbook. I don't know. Look, I should say central banking is always evolving. The central bank that people most closely watch, the Federal reservers going intoards once every five years review of its monetary policy framework. They conducted the last one in the teeth of COVID and came out with inflation would need to average two percent over time, little bit of squishness. At the time, the perception was that would allow them to reduce the economy some more. Do they inject any nuance or wrinkle into that they've got the opportunity to do so? They probably regret back then introducing that extra level of flexibility that there may be loath to say.

This new playbook. I don't know. Look, I should say central banking is always evolving. The central bank that people most closely watch, the Federal reservers going intoards once every five years review of its monetary policy framework. They conducted the last one in the teeth of COVID and came out with inflation would need to average two percent over time, little bit of squishness. At the time, the perception was that would allow them to reduce the economy some more. Do they inject any nuance or wrinkle into that they've got the opportunity to do so? They probably regret back then introducing that extra level of flexibility that there may be loath to say.

So.

So.

The short answer is new playbook. I don't know. Variations on the old one quite possibly. Look, it's an art that's constantly evolving in response to new challenges, but whole new playbooks don't come around every day.

The short answer is new playbook. I don't know. Variations on the old one quite possibly. Look, it's an art that's constantly evolving in response to new challenges, but whole new playbooks don't come around every day.

Bloomberg Opinion colomist Daniel Mass thank you, and you could read Daniel's latest writing on their subject. Trump makes it hydro to get goldilucks just right At Bloomberg dot com, Forward Slash Opinion for more explanations like this from our team of twenty nine hundred journalists and analysts around the world. Search for Quick Take on the Bloomberg website or Bloomberg Business app. I'm Stephen Carroll. This is Here's why. I'll be back next week with more. Thanks for listening.

Bloomberg Opinion colomist Daniel Mass thank you, and you could read Daniel's latest writing on their subject. Trump makes it hydro to get goldilucks just right At Bloomberg dot com, Forward Slash Opinion for more explanations like this from our team of twenty nine hundred journalists and analysts around the world. Search for Quick Take on the Bloomberg website or Bloomberg Business app. I'm Stephen Carroll. This is Here's why. I'll be back next week with more. Thanks for listening.