Why Inflation May Be Here to Stay, Hurting Poor Nations Most

the coming months. We have that chilling story from the tomato fields of Italy. In a few moments. We'll also here how COVID nineteen has turned Australia's attitude to immigration upside down from our economy reporter down under Michael Heath. But first, a rare treat a conversation I just had with one of the most respected economists in the world, professor of the International Financial System at Harvard's Kennedy School of Government and now the Chief Economist of the World Bank,

Dr Carmen Reinhardt. Carmen, welcome to this session and I'm delighted to see you again. It's an interesting time for the global economy because we have this quite a lot of what you might call upside surprises certainly in the developed world, not just on the pace of vaccination in many countries, but also the strength of the recovery. And I see even in your in your latest report, you see your forecasting global growth this year the highest we've

had after a recession for eighty years. So there's also good news there. But we are also conscious that the picture is not so bright in the developing world. So how would you characterize the picture and maybe what are the surprises that you would say relative to what you might have thought at the start of the year. So I think Stephanie, you you hit on the key, the key point without sending sounding cliche. I think that the issue of a K shaped recovery is is very much

on point. The surprises in the advanced economies have been mostly on the upside, and the substantive resources in terms of both fiscal stimulus, monetary policy, and more broadly than just monetary policy, financial uh support and stimulus made the the faster than expected, faster than standard recovery, and the advanced economies the emerging markets for starters, let alone the poorest countries. The developing countries don't have those kinds of resources.

So in every check mark that I may about the advanced economies, pretty much you can take off the check mark for for for many of the developing countries, many have had very limited, very limited share of the population is yet to be vaccinated. Fiscal space, which was already strained in many developing an emerging market countries before COVID, isn't there to provide you know, the big push, the

big stimulus, the big transfers to households. And I'll conclude by saying that it isn't just about fiscal stimulus, monetary stimulus. For the first time in history, emerging markets during the crisis were able to do significant countercyclical monetary policy. However, that experience has already been cut short by very pronounced pickup and inflation. That divergence is critical to the outlook.

So the question you post is is a very relevant one. Uh, you know, given the concerns that we're seeing about, you know, overheating in the US, the possibility the big question mark is the popping inflation, temporary or more lasting. And you know, for the emerging markets and developing world, they're very impacted by global conditions. The inflation we're seeing um certainly in the US, but we got we are seeing it globally. I think the core CPI globally is rising at its

fastest place in in more than twenty five years. So how do you how do you view that? Do you think it's calls for fear or celebration given how much we struggle to get inflation rates up in many developed countries, So you know, I think for the celebration side, you immediately have to think of Japan, right, I mean, they

they they've had decades first deflation and then undershooting. But before we celebrate too much, I think the question that remains to be sorted out is how much of this is a temporary blip and how much of it sticks. I think the concerns about sticking I would I would characterize as threefold. The first one is we don't know what the supply shocks, the lasting supply shocks. COVID has done and continues to create a lot of variation from

the normal trade patterns and supply chains. Transport costs have been doing strange things. The second part, of course, is the monetary stimulus at the global level on the scale, and so those two factors supply side, the multiplier effects of the of the monetary easing, and the fact that it's a global shock. Two thousand two tho nine was not two thou two thousand nine was a crisis and

about a dozen advanced economies, but not global. I think those three factors raised concerns that the the I'm not saying we're off to the races or anything like that, but that I think that the there are there is cause to be concerned that a it's more the inflation pickup has more of a lasting component than just transitory rebound slash overheating. But it's interesting you say concerned. I mean, as you said at the start, that's not just in Japan.

Many central banks around the world have struggled to get to meet their inflation targets, actually to get up to their inflation targets, not least the European central by in

the last few years. If we if we're moving from a world that we've had for ten or fifteen years, where the average inflation in the developed world has been saying one and we're moving to a world where it's more like two, two and a half even three um, is that is that really cause for concern, I mean, is your concern from the fact that you you think that we would struggle to control that because it would certainly give policy makers a bit more room for maneuver

than they've had. Stephanie, if if what you describe is is the issue at hard, then indeed it wouldn't be a concern. But I think let's not flatter ourselves in terms of the what's how how precise lead can can central banks really hit the nail as as we highlighted, it's been undershooting for a decade and if it's nice, well behaved, very moderate, you know, drift upward, what's the

what's the big deal? The bigger deal is that the the sufficiently big spike that lasts for sufficiently long would I think impact inflationary expectations in a in a way that you know, inflation expectations have been really anchored UH for very many many years now, and then you you you know, then you get into uh, perhaps inflation rates that are beyond those that are desired UH in the

advanced economies. One of the things we're seeing with the pop and inflation, especially in many emerging markets but not exclusively, are big increases in food prices. Food prices account for the largest share of the CPI basket in the poorer countries and even much more so in the poorer households. That is a factor. The fact that it is regressive on top of a regressive shark like covid um is

in and of its self a source of concern. I guess the other big change in the last couple of years, particularly associated with COVID, which maybe we can't quite decide is a good thing or a bad thing, or maybe is a good thing and a bad thing, is this very different attitude towards very large deficits and public borrowing in the developed world. We had seen obviously large deficits in the past, but there's been a there's been an embrace of very high deficit spending by developed economies that

we've not seen in quite this way before. You know, would you say that is overall something we should applaud or be also concerned about? Well, it has elements of both. I mean, I am no fair of debt, but I was and have been more than a hundred percent on board on the need to during the COVID pandemic to go in there big. I mean, you know, the point that this was a kid to a war, and therefore you react with that kind of of of stimulus is important.

Now does that mean that I think everything is very benign and we no longer need to worry about debt or or any uh possible delatarious effects. No, I don't think so. But the previous question you had on inflation also, uh, even though inflation is one way eroding debt, if it also is associated with rising interest rates, then the calculus that people have been accustomed to in this low for a very long environment changes. So so I I would not,

you know, declare victory on the issue. And I had one I had one final question, which is, we obviously have had a lot of focus on the G seven. In the last week. There was much talk, including from the World Bank and the International Monetary Fund, about pushing for commitment from the international community to make sure that you had as many people vaccinated as possible in the

developing world in everyone's interests. What we got instead of the fifty billion that the methics would be needed, we got somewhat less than a billion and committed, and we're potentially looking at a very low vaccination rate in the developing well by the end of the year. Was that a failure of leadership the G seven? Were you disappointed? Absolutely? It's disappointment not just in terms of the scale, but

also speed is an issue here. We really are, you know, running a race against variants and virus variants and so on. That that the delay. For example, we were the World Bank supports very much the if advanced economies were to send surplus vaccine sooner rather than later. Again the issue of timing. So it's a step in the right direction, but I think given the scale of the problem, I think more and more rapidly, you know, needs to be done. Come and Ryan Hort, Vice President Chief Economists at the

World Banck, thank you very much for joining us. Thank you for having me. Now, so the list of casualties in the great global supply chain snow that we can now add Italian tomatoes which are rotting in the fields, were told instead of making their way into tins of pasta source. Well, Italy economy reporter Alessandra Miliaccio is here to fill you in on this, let's face a deeply troubling story. Alessandra, how all these tomato who's rotting? Where

are the tins right, that's exactly the issue. There are plenty of the tomatoes, their basic product, but you don't have the tins because the Chinese economy is absolutely booming, and what they need to make the tins um is these particular sheets of metal that are missing basically um there. The Italian producers are telling us that they're asking when the deliveries will come, and the deliries are not coming and there's no end in sight apparently to the problem.

The companies, both Italian companies and foreign companies in India have said that they can't guarantee anything. And the issue is that this type of product needs to be can within thirty six hours after picking. So once you've lost the time, then you just have to leave them. And it's not like I was hoping, oh maybe I'll have cheap tomatoes in the market, but no, they will leave them in the fields because it's not economically convenient to

you know, to actually send them to market. So that's the unfortunate problem and that, I mean, that's the heartbreaking bit. And it's it's five million tons of process tomatoes. I mean, it really is one of the biggest producers, right, that's right. Italy is the number two sometimes number three producer along with China, and the biggest producer is California with a ten million. But the thing is that California can also

put them in Carton's. California can put them in tubes because California is not obsessive like US Italians about their tomatoes, and therefore they're all right with paste that they are right with other kinds of products that are not as fresh, that are differently made. Basically, see the things that you learn on Stephanomics, the key key national differences in how

we like to package our our tomatoes. But obviously, and people who listen to this podcast, now this is part of a broader problem that we've seeing these um I call them supply chain snarl ups, but we're seeing the price of things as boring in key areas, components and also just an inability to get things. I noticed, and it's not just fast to source guys. I noticed the owner of Burger King and Popeye's had an intern that's

Restaurant Brand International. We had a report based on an internal study that they've done, talking about the soaring price of beef mayonnaise bacon. In fact, it said price inflation across the protein market complex has far exceeded even our greatest forecast. So this is this is a global issue, isn't it. Alexander Definitely. Supply constraints are really really bad everywhere. One of the issues I was saying is China because they are, for example, the steel is all going to China.

So they're just issues about packaging. But as you as you just said, there are issues about other things as well. We know that, um there are no boxes right now because of all the Amazon orders. So there's just a series of very strange things that are happening. You will have trouble finding boxes because they've been using too many. Um. You know, last year the issue was people. It was workers that couldn't get to places, so we were having issues.

The tomatoes were riding in the field because you couldn't get the people. But now it's actually the materials and the things themselves, and you know, there's container shortages, there's hoarding mentality still. I mean, there's a lot of products that, especially things like tomatoes, not to go back to that, but that people were hoarding because they keep for a long time, and that just made everything much worse. So

it's a global phenomenon. It will take a while, yes, And I mean I noticed that we had we had a big piece on this actually a few weeks ago, and I like the way that they captured it because it was talking about how, you know, last year it was consumers that were holding their toilet roll and their tomato saws and whatever else, and now it's companies worldwide that are effectively hoardering materials and making things worse because

they're worried about these supply chains. As you as you've been saying, this is obviously one of the factors that's pushing up inflation. But we are hopefully going to see a shift over the next few months as things open up. People won't be buying quite so much on Amazon so much stuff, They'll be buying more services, they'll be going out more. Right. It's it's almost like water being released, you know, after there's a dam that's been breaking, and

so eventually things will calm down and we'll go backward someone. So, I mean that's the theory, at least, I know there are other theories about the same, but the theory is that there will be an uptick and then things will go a little bit more back to normal in the In the meantime we shall probably we have to hold onto our pastor source Alessandra Miniatria, thank you very much,

thank you. For some years now, Australia has been conducting an extreme experiment with high immigration, welcoming in flows of people for a prolonged period that dwarf anything attempted elsewhere. Now that flow helped a fuel economic growth to such an extent the country didn't have a recession for thirty years until COVID nineteen finally did it in. But now, after twelve months of closed borders, politicians and the public seem to be rethinking the so called Big Australian approach.

We thought there might be some lessons in Australia's experience for other countries grappling with the difficult politics and economics of immigration. So we asked Australia Economy reporter Michael Heath to give us his take. If you're a visitor in this country, it is time as it has been now for some while, and I know many visitors had to make your way home and to ensure that you can receive the supports. That was Prime Minister Scott Morrison last

year as COVID scale became clear. It sounded innocuous, but too many temporary visa holders hoping to become Australian it felt like betrayal. Australia has long been a laboratory for immigration, managing the politics of a highly sensitive issue that raises questions over identity and culture, but in recent times its system has started to go astray as the country loaded up on temporary migrants. We're offering limited places for permanent residents.

Those migrating down Under have typically done so in two steps in Toronto temporary visa and then applied for a permanent one under a points system that ranked people's skills, age and so forth. Those points can rise or fall depending on labor demand, but lately they've been rising as permanent visas are directed towards entrepreneurs and high flying professionals.

That's left lots of would be Australians disenchanted. Actually, we were still in school and the discourse started rising, so we were like, you know, we were we knew that we have to stay in school for two years with my class man that was our cos Percy, who with wife Marina, arrived in Melbourne from Budapest in two thousand and seventeen. He a former chief financial officer at the

Hungarian State Opera. She a communication specialist. They're the sort of people Australia once courted, but they've been in limbo since our cost paid to do a mark his degree in accounting, a profession he was told was in demand. Now he's not sure he will have enough points to stay permanently. As I mentioned, was sixty times. When we arrived it was seven d n. It went on seven and we just carculated that no way we can get there. So it was like if this, if this trend continued,

then we won't have a chance. And all of my class me actually got the residences. After four years, he and Marina have given up and I headed to Canada, which offered them permanent residency. Australia's system today seemed less fair than its original seventy five years ago at Bonnagalan

and you had Albrey. They're making new Australians. Eight hundred and forty people from the Baltic States are going to school here for Australia's migration policy has determined that never again shall our new citizens be falsd to fend for themselves. We who had driven from our homes at overjoyed to be welcomed as new Australian citizens. Those horrible years now seemed like a night now many of us, how a lot all their relatives. Until the end of World War Two,

Australia's population was drawn almost exclusively from Britain. But after narrowly escaping invasion by Japan, Australia broadened its horizons. In the post war period, it initiated mass migration under its rubric of populate or parish, Australia opened its doors to European refugees. Jock Collins is a professor at UTS in Sydney and has studied immigration for almost half a century. Australia is one of the great immigration nations of the world.

In the post forty five period after the Second World War, there are only four countries that became settler immigration countries Australia, US, Canada and New Zealand, and as a proportion of the population, we have had a much bigger migration program than any of the other countries. Australia was, however, determined to preserve

its British character. It's set up the ten pound pomp program, whereby the government paid most of the fair for Brits to come to Australia, but that white Anglo saxon Australia is now a distant memory. Today half of Australia's million people are either born overseas with Asia now dominant, or have a parent who was almost one in three year first generation. Here at Sydney's Fish Market, many stores set up by Greek and Italian families in the nineteen sixties

have now been brought out by Chinese families. Like each wave of migrants, they bring a new style and touch. These days, an awesome variety of sushi is available and products are packed with immense care. Just as they're heavily Asian clients like it. It's okay. The last vestiges of the racist White Australia policy were finally abolished by the the Labor government in nineteen seventy three, but it took a bit longer to mean something. If it was up

to you, now, which country would you head for? I think all of the person in the world now I want to go to Austolia. Well, the dominant feeling was that we had to give these people a home, especially people have been associated with over the Australian Embassy or That last voice was Conservative Prime Minister Malcolm Fraser who opened the door to tens of thousands of refugees from Indo China after the Vietnam War. We were leading the world in the eighties and nineties when we were sort

of introducing multiculturalism and that sort of settlement policy. Jock Collins. Again, there was a time in which Australia was a model that other world countries looked at, particularly as other countries in Europe and not discovered immigration was an important thing. In two thousand and one, facing a title election and with rising numbers of people arriving illegally by boat from Indonesia, Conservative Prime Minister John Howard deployed the navy to stop them.

He politicized border control and then wrote it to victory. Ironically, that tough border stance allowed his government to ratchet up legal immigration. It was needed as Australia's economy boomed in response to China's demand for minerals. Between the second half

of and the end of two thousand and nineteen. As Australia's economies that had developed world record for a stretch without recession its population increased by forty The new arrivals and their demand for housing and goods helped the economy surge. The nation had found a sweet spot. The points system

attracted smart, educated, younger people from across the globe. Meanwhile, it's education industry, the country's fourth largest export, also offered a path to permanent residency for talented students that appealed to Prime Minister Boris Johnson, who argued for something similar once the UK left Europe. Australia's draconian response to illegal entrance by boat seemed to appeal to President Donald Trump.

In fact, Australia is too faced on immigration, exceptionally severe toward a legal entrance, while generally welcoming toward legal arrivals. The Grant And Institute is critical of the government's approach in a new report, Gone is the time tested policy of courting young skilled migrants best place to succeed down under. Instead, two fits of permanent visas now go to entrepreneurs who have brought negligible investment and an untested high flyers program.

When this whole crisis started, you know, the whole government and everyone pretend that they have nothing to do with the immigrants. That was our cost percy again, and everyone is here just because they have nothing else to do. So it's like they have no no responsibility over this. I don't know, two million temporary vies, the holders who

live here and who have a life here. As Australia moves on from the pandemic, it's reputation as a melting pot for the world is changing and the landdown Under is grappling with the same immigration challenges as the rest of the world. For Bloomberg News, I'm Michael Heath. Well that's it for this episode of Stephonomics. I'll be back next week with a lot more from around the world. And remember, in the meantime, you can get a lot more news and analysis from Bloomberg Economics by following our

economics on Twitter. This episode was produced by Magnus Hendrickson. The special thanks to Dr Carmen Reinhardt, Alessandra Miliaccio and William Heath. Mike Sasso is executive producer of Stephonomics and the head of Bloomberg Podcast is Francesca Levy.