Here's Why Inflation Could Be A Bigger Problem in 2025
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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 2% target. 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 where it'll go from here. So here's why inflation could be a bigger problem in 2025.

Bloomberg Opinion columnist Daniel Maas joins me now for more. Daniel, first of all, can we say that the 2022 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 2% inflation, an average of 2% over time, a

according to an indicator called PCE. So in 2022, around the middle of that year, PCE was above seven. So 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 are largely nuanced. I'll 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 stickiness 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 2022 situation.

the governor of the Reserve Bank of New Zealand, fresh from a 50 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,

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 kudos. It's part of the monetary folklore of the post 1945 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 deprivation?

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 floor under disinflation and possibly pushing inflation up a little bit, you know, 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 2021, 2022 and part of 2023, you know, a blip? And we go back to where we were with lowflation, Janet Yellen's famous mystery comment.

Or was that at the start of something new, where inflation is constrained from its higher 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 hiccups should we be 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 3%-ish, 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 2.1%.

It's around 2.7, 2.8. Do I foresee it going to something like 4? No. JP Morgan economists were discussing this on a recent podcast. I know you're a fan of podcasts, so I raise 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. You can be more or less okay with PCE between 2 and 3, 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 economist of the IMF, this is almost mission accomplished in terms of inflation. And it's been accomplished without a global recession. Go back to the dark days of 2022, there was a fairly common idea around that it was going to take a recession to wring 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 has foreshadowed higher tariffs on Mexico. I don't think they're allowed under USMCA, which was the revised NAFTA, 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 sheets 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 Reserve, is going into its once every five years review of its monetary policy framework. They conducted the last one in the teeth of COVID-19.

and came out with inflation would need to average 2% over time. A little bit of squishiness. At the time, the perception was that would allow them to juice 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, though they may be loathe to say so. The short answer is new playbook. I don't know. Variations on the old one, quite possibly. Look, it's an understatement.

art that's constantly evolving in response to new challenges, but whole new playbooks don't come around every day. Bloomberg Opinion columnist Daniel Moss, thank you. And you can read Daniel's latest writing on this subject, Trump makes it harder to get Goldilocks just right at Bloomberg.com forward slash opinion.

For more explanations like this from our team of 2,900 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. What could you do if your data was working for you and not against you?

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