Inflation Poses a Growing Credibility Risk for Central Banks

We also have a report from Bryce Batchuck in Switzerland explaining why it's potentially bad news for the unvaccinated in the developing world that trade ministers didn't meet in Switzerland this week. But first at Bloomberg, we spent quite a lot of time digging out interesting numbers, plowing through public statistics, finding the stories that are hiding in plain sight, and

sometimes it's being Bloomberg. Those stories move financial markets, but we often have one that makes it almost immediately to the Senate floor is Ohio Senator Cheryl Brown earlier this week at a hearing on the US economy. One final point on inflation. Just this morning, Bloomberg released a story with the headline pretty much says it all. Fattest profits since nineteen fifty de Bonk wage inflation story of CEOs. The f d i C also just released its quarterly

report shocking No One bank profits are up. The idea that these corporations can't afford to pay workers higher wages, wages that actually reflect the value of the work they do to make these companies profitable, is ridiculous. One of the authors of the story quoted there was US economy reporter Matthew Bosler. Matt, thanks for coming on Stephanomics again. So just tell us what was so interesting in your

piece that it got picked up in this way. Well, the two signal numbers from the piece were corporate profits up thirty seven percent over the last year, employee compensation up twelve percent. And so you take those two numbers and you put them together, what do you get The highest profit margin for corporate America since nineteen fifty, So absolute boom times for American business. You know, we're hearing a lot about labor shortages and how fast wages are

going up. Profits are going up about three times is fast. So you can see why democrats will be interested in this story because you've had so much discussion of rising wages and shortage of labor, and chief executives have been complaining about that, saying that was all the reason for inflation,

that wages were going up. I mean, in the sense your story was suggesting that that line is just not true, right, because you know, look at the profit margins, right, they're going up, which means you know, wages are going up, costs are going up, yes, but the prices that consumers are paying, that businesses are charging are going up much faster. And so that's kind of the flip side of the whole inflation story, right, when you're paying higher prices as

a consumer, someone else is charging higher prices. Uh. And in this case, the people charging higher prices are certainly coming out well ahead, as evidenced by that profit data. Well, I guess one thing the Republicans have said is that the inflation has been driven by the big spending of the government, the enormous stimulus packages that continued under President Biden. I mean, there's is there any truth to that? Yeah,

there's certainly truth to that, right. I Mean, we've talked a lot about the inflation story in the United States and around the world. M Obviously there have been big changes to both supply and demand that have been brought about by the pandemic um, a lot of fiscal stimulus in the United States that's kind of pumped a lot of demand into somewhat narrow supply chain infrastructure that has not been able to keep up. And so they're absolutely is some truth to that, and that's also why profits

are up so much, right. I mean, you have a situation where, um, the government bolstered household incomes, actually boosted household incomes in the middle of a slump, which is totally unprecedented, and that meant that households had more money to spend, and they spent it. That's a point we tried to make in the story is that when businesses pay higher wages in aggregate, a lot of that money comes back to them. US households and aggregate don't save

that much money. Um. The savings rate is on the order of say five to eight percent. And then of course they're also paying some of that money that they receive in their paychecks back to the government in taxes, but most of it goes right back to American businesses and aggregate in the forms of revenue. Well, that was the the original insight of Henry Ford when he started paying his workers more was that they were all then

going to go buy cough a long time ago. UM. I guess it's quite a you things in this story that you could imagine politicians being interested in. But is there really a sense that Democrats are trying to to stop profit margins going up? Well, that's certainly become a bigger part of their rhetoric in recent weeks, as this inflation conversation has reached a bit of a fever pitch and Republicans have UH taken a stronger attack in trying

to use it as a political cudgel against Democrats. Democrats are turning the argument around and saying this is not so much about UM over stimulating the economy. This is really about big companies UM raising prices more than they need to UM and that is what is sending inflation higher. And so UH President Biden specifically called out the gasoline industry. Obviously, gas prices, what you pay at the pump, is a

major point of contact for American consumers. Wholesale gasoline prices have gone down in the last couple of weeks with this rolling over, but we haven't seen that pass on to the pump yet in the form of lower retail prices, and so he's kind of trying to point the finger at them and place the blame there. Now, that's a

pretty common dynamic that we've seen historically. The thing is, it's not obvious that there's much that Democrats can actually do about this in terms of actually bringing anything to bear other than using the bully pulpit, and so it remains to be seen where exactly they are going to take this. And we should say the bully pulpit included the Speak of the House, Nazi Pelosi's office, which put out a statement also based on your piece, so you know,

famous famous for a day. Um, there is a big question coming out of lots of conversations around the Federal Reserve, which you mentioned at the end of your piece, and that's the when you talk about whether inflation is transient or not, the measure of that is often are you

seeing wages going up as well? And the Fed is kind of not so worried if it doesn't see wage growth, but if it does see wage growth rising as fast as inflation, or even faster than inflation, that's a signal that it should clamp on the Brakes and the traditional view of monetary policy. One of the questions raised in your pieces, well does that is that a long term recipe for labor, the labor share of total income remaining static when it could potentially be rising relative to the

share for profits. Yeah. I think that's one of the most interesting parts of this conversation that tends to go a little bit under the radar because we're not used to talking about monetary policy in these terms, but it's something that has kind of crept into the minetary policy conversation over really the last couple of years, even going back to just before the pandemic and the you know,

the bottom line there is there's an arithmetic here. Uh, there's wage growth, there's inflation, and if wage growth is rising in excess of productivity growth, then you might get inflation. But you also might just get a compression and profit margins because businesses could theoretically choose to instead of raising prices, allow profit margins to contract and allow the labor share of income to rise. Now we're having this conversation in a moment where the labor share of income has fallen

to really historically low levels. Uh, certainly in the wake of the two thousand and eight crisis, and since then it's started to creep back up a little bit, but it's still really um, you know, at historically low levels. Even so, and so the question that some people at the FED are raising is just if we are going to clamp on the breaks with monetary policy every time we start see wages rise, we we really are lacking

in the labor share at these low levels. And so that's something that at least some people at the FAD want to be mindful of going forward as they contemplate how to read these inflation numbers and how to respond with monetary policy. Yeah, just where the FED doesn't want to be there, right in the middle of a very hot political topic. Well, Matthew Bosler, I know that you're actually supposed to be listening to what the Chairman of the Federal Reserve is saying right now. So I'll let

you go, but thanks very much for joining us. Thank you. So now we have a treat for me and I hope all dedicated Stephonomics listeners. Conversation about the state of the world with the economist, author and former chief Global economist for HSBC, Stephen King. It's Stephen. What I always enjoy about your work is you take the long view. In your case, the long views often very long, indeed

sometimes a few centuries. But this has been one of those weeks when the longer term outlook seems to be changing every day, with news of this new COVID strain, putting governments back on the defensive and market sea soaring wildly on the back of different assumptions about the recovery. So I guess we should start with a macron how much has that caused you to rethink the shape of the recovery West? Definitely. I think it's an issue of

uncertainty more than anything else that you know. The reality is that when you've got a bit a new virus, you haven't got years and years of data to to look at to pretend you know what's going on, which

is what economists do. You've got something which has just come along very recently, which of course has a nasty habit of mutating, and the result is that all the sort of beliefs that people had are going from a kind of pre pandemic world to post pandemic world has all become frankly a lot more blurred, a whole bunch of other things have begun to change, notably the fact that over recent months we've had we've had an awful lot of inflation coming along with that rather limited growth.

So there are two big questions. The verst is how much of that, to use the dreaded word, is transitory and how much of it reflects a kind of lasting

change really, and how economies are are behaving well. I do want to get into that, but I'd like to talk a bit more about the challenge that central banks are facing, and an interesting move by the US Federal Reserve this week, with the chairman J. Powe suggesting that the US Central Bank might accelerate the end of quantitas of easing, so stop pumping money into the economy sooner than people were expecting. And that was despite the worrying

news about the new variant. It's very different from what happened in the UK, where the feeling is that the news about a micron is going to make the Bank of England postpone the interest rate rise is that we might otherwise have expected this week. So if you think about the different responses of those two central banks, is

the UK just being more cautious or what's going on. Yeah, they might be, And like I guess, it's coming back to the uncertainty that if you've got a fundamental uncertainty, you can come up with all sorts of different depensions as to what you do about it. One of the problems though, that central banks have is that they're they're looking at this and saying, oh my gosh, growth could be weaker, there could be greater uncertainty. You know, things

that we thought would be happening are not gonna happen. Therefore, GDP is going to come in lower than expected. You know, there's more spair capacity. Therefore everything's going to be more disinflation. But again, what's happened over the last few months is that activity has been probably in anything, a little softer than expected. But we know now I think that a lot of that software activity is because of not so

much demand side constraints, but supply side constraints. And you look at the UK over a million vacancies currently, which is you know, the highest since this current series began back in two thousand and one, UM. And you look at the the US and that you know, last week's jobless claims with a with the lowest since nineteen six nine.

So you know, whereas I think originally central banks could sort of console themselves with the idea that there are a few little shots coming through the second hand car prices or semi conductor sales, you've now got this much more complex picture of shortages appearing not just in product

markets but labor markets too. And I think to a degree, what's happening with the fair is is a sort of grudging recognition that even if activity is not that strong, there are other indicators of passia in the economy, which is mostly driven by the supply side. The UK kind of there, but not perhaps quite as confident about that.

So let's let's go to the long term. We have got used to a long period when inflation was always low, and actually all the shocks that central banks had to deal with we shocks that we're going to reduce inflation on balance with disinflation. So what we're having to get our heads around, and I guess why people mentioned the seventies is it feels like we've got shocks coming now that are inflationary or even potentially stagflationary, so increasing inflation

and also reducing growth. And it's it's hard for central banks to do very much about that. It is, although, of course, eventually in the seventies and eighties, you know, Paul Vocal was appointed, he did something pretty savage relaciously apply a sledge how much of inflation and into each of the US and in need the global economy at the same time. So things have actually may have to happen, but it maybe a sort of reluction process. So why

have we got lots of inflation? And I think one reason is that at the micro level there are fundamental information failures, and there are failures of stations with locking down markets for months and months on end. If you think about what markets do, they transmit information. They transmit information between buyers and sellers, touch uses and consumers, whatever.

And if you shut them down, then you lose their information and the last sort of historic price record, it might be months earlier, it is no longer particularly relevant for what happens when things reopen. I'm talking very simple terms here, of course, but but broadly speaking, that's what I think has happened. So you have this lot of information, but it's not just lots of information in say the said being conductive market or in secondhand cars. It's a

loss of information across multiple markets. So it's a lot of information about the number of waiters you're require in London restaurants. It's a lots of information about the number of truck drivers you require to keep your logistics back

to normal. All these things and losses of information. Now, of course, if you apply this at the macro level, the way you probably interpret this and say, well, if you've lost all this information and resources can't be allocated particularly efficiently, you're going to end up with a sort of shift downwards in productive potential. You're worse off than

you were. You've got less productive potential than you had expected, so your supply performance is worse than it was, but at the same time because you've got rising demand, because that's what the sort of political demands are to get back to where you were before the pandemic. So in one sense, this is a sort of I mean, it is a bit stagflationary in the sense that you've got a lot of potential, a bit like we saw in the nineteen seventies. There are to be fair some big differences.

One big difference is that you haven't got the pressure in terms of unionization that you have in the nineteen seventies, and the pressure in terms of pushing wages up on an annual basis, that's missing. You haven't necessarily got the pressure coming through in lots of lots of other ways, big differences. But at the same time, I think this, this loss of information is a fundamental feature of what's

happened in recent months. And the idea that you could simply sort of turn the economy off and then switch it back on again with no problems whatsoever, which is effectually what all the forecasts kind of assume that I think has found been found found to be not quite right. Once you recognize that, not so surprising that you end up with more inflation as well. Well. That's a very sweeping and fascinating explanation of what's happening, and I think it is an interesting way of looking at it. But

what you've described seems to me inherently temporary. I mean, it's not a permanent loss of information or supply side failure, and you can't help thinking, I mean, one of the big differences between now and the seventies is we're in this highly digitized world with just in time supply chains and more and more ways of getting information about demand and supply in different parts of the economy. So so why should the Federal Reserve or anyone else expect this

inflation to last? So I think one of the issues for central banks is, Okay, it might be a temporary phenomenon, but the longer it goes on for the less confidence the public will have in what the central banks are saying they gained to achieve at some point in the future. Um And if the public work with sort of simple rules of thumb I think most of us do, most of the tiny shortcuts in the shortcut up moment is exatically two percent in two years time, So that's what

centered back to tell is going to be. But if after a year or two years inflation is still got above that, it's not so difficult to see the public beginning to lose confidence in what the center of banks are going to achieve, at which point you haven't just got a supply side shot, you've got an expectations problem

beginning to build in as well. Now there is a way around that, And in one sense, this is what I think j Pal is getting at, which is saying, Okay, we recognize that this trade off might get worse to be recognized. It might lose the confidence of the people. So one way to to reinstill confidence it's a typing country policy, is to show that we really mean to

get control of inflation. So that's interesting. So what you're saying is it's not necessarily a permanent rise in inflation, even though it lasts for a while, But you have this risk that if it lasts long enough, people will start expecting inflation to stay higher, and then that becomes self fulfilling. So that the most important way to prevent us going from stage one to stage two is for the central bank to at it right. The most important central bank that needs to get it right as the

Federal Reserve. So maybe if we are going back full circle, it's quite important that the Fed did send that signal earlier this week. Well, we're talking about the World Trade Organization on the program this week. We don't have much time.

I know you have lots of lots of views about it, but I mean obviously that the real life side effect of the information failures you were talking about earlier is all those container ships queuing up outside Long Beach and all the issues we've talked about to do with global supply chains and trade, and it's also a lot of question marks about the future of globalization. So so very briefly, you know, how long do you think you will see this supply chain problem and will that be a permanent

shift in the nature of globalization. I think there's a shift that's having actually before the pandemic, and one reason for that yet was obviously deteriorating lations between the U S and China. So the world is I think more divided than it was, which itself is not so good from a kind of a multilateral trade deal perspective. Of course, you can still have bilateral and regional deals, which I

think will still come through to a certain degree. But if you really believe in multilateralism, and that I think was always already in difficulty. But i'd also an act to that. And I think that the pandemic has created this sort of sense of vulnerability to global supply chains, and those that can work out how to do it might be thinking about how to reduce their dependency on

those fragile chains. And if you think about globalization, I suppose in the last few decades of the twentieth century, a big chunk of it was mobile capital going in search of cheap labor in other parts of the world.

But I think it is plausible to argue in a lot of different areas that technology would allow supply chains to be shortened for robots at home to do what cheap cheaper workers who abroad, and that might lead to a rather different world to the one that we've been used to in recent times, whereby um, there's more home production, there's a greater division between the hands and have not in terms of countries around the world. And then finally

they have not. The countries which are no longer going to receive this capital are likely to find their labor itself becomes increasingly mobile but trying it tries to go to countries where there are better opportunities. Um So, if we talk about this with a migrant crisis at the momentum, given demographic trends over the next few decades, and given this idea of robotics and AI, I think that migrant crisis might become much bigger. Well, that's definitely fuel for

future books by you and future conversations, I hope. But meantime, Stephen King, thank you very much. Thank you. I mentioned the World Trade Organization and trade ministers from around the world were supposed to be getting together in Geneva this week, but thanks to that new COVID variant, the whole thing got postponed. Now you might not care a whole lot about that, but it turns out you should. Here's our

trade reporter Bryce batchuck in Geneva. Goodriz and hello from Switzerland, famous for its Alporns chocolate fondue and The World Trade Organization. The WTO is the world's top international trade body and provides a forum for governments to hash out their trade disputes and negotiate new trade deals. This week, the w t O is supposed to hold a critical meeting in Geneva, where some four thousand officials from around the world would gather to talk about the future of the global trading system.

But the spread of a new virus variant forced the debteur to postponent's meeting and delay efforts to rehabilitate an alliance that's been battered by years of neglect, trade wars, and the COVID nineteen pandemic. The twenty six year old trade body hasn't produced a multilateral outcome for the better part of the last decade, and it's still reeling from former President Donald Trump's attacks over the past four years.

I would say the w t O was the single worst trade deal ever made, and if they don't shape up, I would withdraw from the w t O. In the coming months, the w t O has a big opportunity to show that it's still relevant to the lives of regular people by helping to speed the global vaccination effort. Advocates from across the globe are demanding that the w t O members agree to waive intellectual property rights for

COVID nineteen vaccines. It's an emotionally charged issue and for some the debate is nothing less than a life or death battle to save people in the world's poorest nations. W TO Director General Goziala described the situation like this. Proponents of the wave as strongly ben this is necessarily and important to avoid being in this kind of situation in the future. Now, now and in the future now. Those who are non proponents believe that this we wouldn't

have gotten vaccines in the first place. If you had had a waiver in place, it would not have been incentivized. This speak of research and innovation. So these are two opposing sides, but we are and of course doptwo is a negotiative for so we need to bring the two sides together. But because views are so strongly held, we're talking about people's lives, it's not been as easy um

to bring those two points of view together. This debate has been raging since October, when Indian South Africa introduced a proposal to waive enforcement of the Debt Agreement on trade related aspects of intellectual property rights or trips for short. They argue that without a waiver, poorer nations can't have the legal certainty that they need to produce COVID nineteen vaccines and medicines that are mostly manufactured in Europe and

North America. Today, only about seven percent of people in Africa have been fully vaccinated against the coronavirus, compared to some fort in the rest of the world. While the US, China, and scores of other nations support the concept of an IP waiver for vaccines, the European Union, United Kingdom, and Switzerland have all lined up against the proposal. The idist to waive intellectual property Russian particular patient Switzerland's ambassador to

the d d A Chambau. So it would mean, if these proposal is accepted, that all inventions in connection with COVID nineteen would not benefit from patent protection. It means that the regulator will simply not consider any request to

get a patent portals product. And it means also that the originators, the developers, the companies which have invented those products will not any longer enjoy exclusive marketing rights and they will not be able to recoup their investments through the protection that is provided by the intellectual property protection.

Switzerland is of course not ready to do this, but we remain convinced that the trips waivers you call it will not lead to the production of one addition of those vaccine and may geopodize existing partnerships that have allowed to increase production. Advocates the waiver say the spread of the O macron variant brings even greater urgency to the need to waive intellectual property rights for vaccines. Here's you on who a senior advice or at the International Humanitarian

Organization MEDS on San Flontia. The postponent of the Ministrul conference is a quite ironic but at the same time strong wake up call for come try to realize. Without control this pandemic um the global trade and other social economic issues will go into it, continue to suffer, and then the postponent is actually remind us the trips weaiver

is needed now more than ever. The postponent at the debts meeting this week will complicate the trade bodies efforts to present a unified and rapid response to the pandemic. But more fundamentally, this the labeled hamper efforts to reform an organization that's failed to evolve with the massive shifts that have incurred in the global economy. If members can't agree to collectively move forward on issues aimed at helping real people, it could result in less engagement and usher

in a more serious shift towards fragmentation of global trading system. Ultimately, that means greater uncertainty for businesses and higher costs for consumers. This is Bryce Bashick with Bloomberg News in Geneva, Switzerland. Well that's it for this episode of Stephanomics. We'll be back next week in the meantime. If you like the program, please rate it and follow at Economics on Twitter for

more news and analysis from Bloomberg Economics. This episode was produced by Magnus Hendrickson and Matthew Bosler's co authors on that story about US profit margins were Katia Dmitrieva and Joe Doe. Special thanks also to Stephen King and Bryce Batchel. Mike Sasso is executive producers Stephonomics, and the head of Bloomberg Podcast is Francese and leaving mm hmm.