Transcript: Why inflation is sticking around

This is an audio transcript of the FT News Briefing podcast episode: ‘Why inflation is sticking around’

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Sonja Hutson
Good morning from the Financial Times. Today is Thursday, March 21st, and this is your FT News Briefing.

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The EU debates defence spending, and nuclear energy is making a comeback in the US. Plus, we asked the FT’s Chris Giles whether inflation has stopped falling.

Chris Giles
The figures were getting better and better. Now, they are seemingly getting worse. It’s something that’s going to make everyone a little bit more cautious.

Sonja Hutson
I’m Sonja Hutson, and here’s the news you need to start your day.

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French President Emmanuel Macron is going to urge EU leaders today to adopt a pretty radical plan to boost defence spending. He’ll propose issuing joint European bonds at a summit in Brussels. The European Union is trying to figure out how to step up its support for Ukraine but also reinforce its own defences. The idea is that the bloc would issue bonds as a collective, and that would help finance the development of Europe’s defence industry. The EU did something similar during the pandemic, but Germany and several other so-called frugal countries say that joint debt is not a viable option.

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Going into this year, it looked like inflation in the US was heading in the right direction. Markets were even confident that the Federal Reserve would start cutting interest rates in March. But then, inflation came in hotter than expected in January, and it actually ticked up in February. Yesterday, Fed chair Jerome Powell hedged on exactly when they’d start to cut rates.

Voice clip of Jerome Powell
We believe that our policy rate is likely at its peak for this tightening cycle. The economic outlook is uncertain, however, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.

Sonja Hutson
So mission not quite accomplished. Here to talk to me about why inflation remains so sticky is the FT’s Chris Giles. Hey, Chris.

Chris Giles
Hello.

Sonja Hutson
So give me a little bit of an overview of inflationary trends in the US lately. What’s behind these higher prices that we’ve been seeing?

Chris Giles
Well, the overall trend is still broadly downward. And what we’ve seen is there’s been a very sharp fall in the rate of inflation, particularly of core goods. The problem is really in services, core services. So going out for a meal, insurance, all of these sorts of things, and it’s about 61 per cent in the US of what people spend. So it’s big, and really big in that is rental prices as well. So shelter, what you pay, ultimately are paying to live in your home. And just recently everything was effectively looking under control. And then we’ve had two bad months in January and February. And that is what’s beginning to worry people. They’re after a long period of every month, the figures were getting better and better. Now they are seemingly getting worse. It’s something that’s going to make everyone a little bit more cautious.

Sonja Hutson
Yikes, OK. So how much of this is a holdover from the pandemic? I mean, when we really first started to see inflation, people were talking about it as transitory, kind of an after-effect of the pandemic. To what extent is that still a factor?

Chris Giles
So there was a lot of inflation that was really transitory. And that was particularly in manufactured goods. So we started to buy many more of them across the world, particularly in the US in 2021. It’s also when cheques landed so people couldn’t go out and spend on services, so they rotated their expenditure much more to goods. And prices went up very fast. And then that’s been bleeding into services through the process of inflation goes up, people ask for more wages. And in all the literature and in lots of academic studies, services inflation is much stickier on average than goods inflation because goods inflation often is caused by something happening in the world or energy prices and services prices because it’s often domestic-related and linked often to wages, it’s often a little bit more persistent and more worrying. Now the inflation rate really needs to come down before you can be confident enough to cut interest rates.

Sonja Hutson
Yes. So looking ahead then, what cues should we be taking from the Fed as they decide if and when to cut rates?

Chris Giles
I think we need to be looking at the Fed’s forecasts. What the Fed says. So how is it thinking about it? What is it wanting to see? And I would have thought what the Fed wants to see is persistent progress back towards 2 per cent inflation. Or if we began to see the job market cracking. So that was on the real side of the economy. We saw some real weakness. That again would, I think, make the Fed act sooner rather than later. But to the extent that the economy is ticking over quite nicely, which it is in the US, most people think the Fed will want to wait at least until the early summer. So June will be the earliest time the Fed would cut, and maybe it would be later than that. So it’s going to be a slow and cautious way down. And I think that would be the big watchword for the months ahead.

Sonja Hutson
Chris Giles is the FT’s economics commentator. Thanks, Chris.

Chris Giles
Thank you.

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Sonja Hutson
The ecommerce giant PDD Holdings had a bonkers end to 2023. If you haven’t heard of PDD Holdings, it’s the parent company of the ultra-cheap shopping site Temu. Yesterday, PDD reported a more than doubling of quarterly revenue for the last three months of the year. Now, while analysts estimate that Temu itself isn’t profitable, PDD said its profits have been driven by transaction and marketing fees on its platforms. Honestly, it’s all a little bit of a black box. PDD launched Temu in the US more than a year ago and has since gone on a multibillion-dollar advertising blitz to gain market share. And now Temu even threatens big players like Amazon and eBay with its low prices.

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Right now, there’s a huge demand for energy in the US, and one way to meet it is nuclear power. But that’s expensive. And the supply chain is heavily dependent on Russia. Enter TerraPower, the company founded by Bill Gates, plans to bring a cheaper, more efficient type of plant to the US. Here to talk to me about it is the FT’s US energy editor Jamie Smyth. Hi, Jamie.

Jamie Smyth
Hi.

Sonja Hutson
So tell me a little bit about this new type of nuclear power plant. How is it different from previous ones?

Jamie Smyth
So this plant, which TerraPower are planning to start building, is probably the most advanced of a new generation of nuclear power plants, which people often call small modular reactors. So the big difference of TerraPower’s reactor is that it is cooled by liquid sodium rather than the standard water coolant. Now, the company says that this enables it to save a lot of the cost in actually building the reactor. So they’re saying that their reactor will cost at least half of what a standard nuclear reactor would cost. And that’s a big issue because they tend to go way over budget and get, you know, very lengthy delays. So there’s a hope that this can sort of get a new generation of nuclear reactors out and build to meet power demand.

Sonja Hutson
Wow. OK. Yeah, that sounds like a really significant development for the industry. What are advocates saying?

Jamie Smyth
Well, they’re saying it’s going to be a game-changer. They’re saying these new reactors are going to really help meet the challenge that we all face in meeting the Paris climate goals because the great thing about nuclear energy is, of course, that it’s emissions-free. Also, it doesn’t rely on digging stuff out of the ground like oil and gas. The US has a big store of oil and gas, but it also boosts your energy security win you can generate power through different methods. So they’re saying that it’s an energy security when as well.

Sonja Hutson
Yeah. Can you tell me a little bit more about energy independence and kind of some of the geopolitical factors there?

Jamie Smyth
The great thing about nuclear power plants are is that when you actually add the fuel to them, they don’t have to be refuelled for a year or two. So that gives you quite a stable source of energy. You’re not reliant on imports of natural gas like we saw in Europe. Whenever Russia invaded Ukraine, there was a huge issue with gas supplies. However, one issue that will need to be solved if the nuclear renaissance in the west is going to take off is that at present, the nuclear fuel supply chain is controlled to a large degree by Russia. So the US and other governments are working to try and rebuild their nuclear supply chain. So they’re trying to build new enrichment facilities, which could enrich uranium, which is used in the nuclear fuel. So the US is racing ahead so that it isn’t reliant on Russia.

Sonja Hutson
All right, Jamie, what are some of the risks if the US is not able to build up its own nuclear power supply?

Jamie Smyth
We are seeing a huge increase in power demand in the US, and that’s partly driven by AI data centres. They suck up a lot of energy, and there’s lots more of them being built. But also, we have a lot of reshoring under the Biden administration’s Inflation Reduction Act. So you have something like 600 new manufacturing plants setting up in the US. So we need more sources of energy to meet that demand. Nuclear is one that a lot of companies are looking at because when it gets up and running, it can be a very stable source of power. However, it does have certain drawbacks, and that is that we need to see that it can actually be built at scale, on budget and on time, or else I think the nuclear renaissance would really be challenged in terms of getting going. So the government is stepping in. It’s offering up to $2bn to TerraPower to get its first plant off the ground, which is a significant public investment. It’s also pushing a lot of money into the nuclear supply chain. They’re really trying to incentivise this new nuclear renaissance.

Sonja Hutson
Jamie Smyth is the FT’s US energy editor. Thanks, Jamie.

Jamie Smyth
Thank you very much.

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Sonja Hutson
Before we go, don’t forget, there are two weeks left to take advantage of a sale that the Briefing is offering. From now until April 4th, you can get up to 40 per cent off an FT digital subscription. Just go to ft.com/briefingsale for more details. We’ve also got a link to that in our show notes.

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This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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