But what's the key thing to think about when we look from the consumer viewpoint?

Yes, consumers don't really tend to think about inflation in the way an economist would or the way a policymaker would.

And that's because of a variety of issues.

So the first point is that consumers tend to just take their experience today or what they think is their experience today and project that forward into the future.

So if you ask someone, an ordinary consumer, what do you think inflation will be in 12 months' time, that will be very strongly influenced by what they think inflation today is.

Of course, inflation can go up and down, but they tend not to project that.

And then the next thing is that consumers suffer from what economists call frequency bias.

How do those shape the narrative from the company standpoint?

And maybe that's one of the reasons why you and your colleagues, right, need to engage with that new demography right now, right? Because they're already maybe moving some of these levers.

No, absolutely.

And this is something normally for higher wealth individuals.

The median wealth is less likely to be skipping generations and so on.

No, it does happen.

But we need to start rethinking about the future.

focus, the desires of the new owners of wealth as this change, which is already underway, continues to evolve.

Do you think that could be part of it?

I mean, let's start maybe with what that might involve for the US and public policy, and, and then perhaps we can sort of turn back to Europe and, and some of the global implications.

Well, um, so I think the, the assumption in financial markets is that the, um, Republicans will lose control of the House of Representatives.

In a, a midterm election, the incumbent party normally loses seats.

The Republicans have barely got control of the House of Representatives as it is.

The critical thing there, though, is that if they don't have control of the House of Representatives, they don't have, um, control of the speaker.

The speaker would become Democrat, and they don't have control of the committees.

The committees and the, the very powerful committee chairs would be Democrat.

Um, I mean, we-are we mo-we're moving it seems then, um, as the more ex-as fringes of, um, the political establishment become, uh, more, more powerful and more important towards a very different kind of economic system.

When does this issue become a problem that's just too big to ignore?

I think that that's a long time into the future, I have to say, at least in the sense of, you know, is America going to have a Greek-style debt crisis? No, it's not.

Greece isn't going to have a Greece-style debt crisis.

So what is going on here? The first point to bear in mind is that in almost every single major economy in the world, government debt ratios, so we conventionally think about debt to GDP, Government debt ratios are below, very often substantially below, their historical averages.

And they're certainly below the all-time highs.

In the United States, debt GDP peaked at over 150% of GDP in 1945.

We're below that at the moment.

How do these two eras of the Fed compare to each other? How are they similar? And then how are they different?

Do you think the inflationary fears have been overplayed and overblown?

Uh, I think that there has perhaps been a little bit of a, uh, a problem coming back from the, the 2022 inflation episode.

Now, the 2022 inflation episode, or really three inflation episodes back to back, was a very, very unusual set of circumstances.

And the problem with that is that it doesn't matter that 2022 was a really peculiar set of circumstances.

Your mathematical economic models are still gonna incorporate that peculiar outcome into their history when they're trying to consider the future.

So that may at the margin be giving us this slight skew.

It's certainly the case that very recently most of the inflation numbers have been coming in lower than expected across the developed world.

Um, what, what happens next with that? And, and what does it tell us about A- America's ability to influence the bigger global economy in what would've traditionally been seen as its, its, its role a- a- and its, its strength?

Um, uh, perhaps you can just focus, um, partly on the ECB in this regard, but it does seem that the risk of a more aggressive tightening cycle seems to have faded.

Yeah, this is an interesting one.

The markets got very worked up about this.

Economists generally did not because economists weren't seeing any of this spillover effect, second round effects as, as we call it.

So as I said earlier, we, we have seen the oil price pass through fairly quickly.

If you've got higher oil costs, you've pushed this onto the consumer 'cause the consumer's been expecting it.

And so you've had energy surcharges on taxis in Chicago or on deliveries in the UK.

Um, are we seeing any real progress there, or is it mostly just headlines?

Is that right?

It is, but we, we have to be careful about extrapolating too much.

So, you know, one of the characteristics of wealth ownership is that different groups in society will concentrate their wealth into different assets.

So typically, real estate is dominant for the median, the, the more middle income households.

That's typically the, the largest asset you own is your house.

Whereas as you go further up the, the wealth spectrum to higher wealth individuals, they will hold more of their assets in the form of financial assets.

So if, as, as James has just pointed out, if we have a year where equities do very well and outperform housing assets, which is generally what has happened over the course of 2025, then you would expect to see a- A, a growth in wealth inequality, uh, coming through.

I don't know, d-does the report this year show that it's the same factors [laughs] that were always front of mind? Are there other things to be more aware of or perhaps other things that get foregrounded just because of the unique dynamics of 2025 into '26? But typically, what are some of those things that ensure a resilience when it comes to wealth?

An interest rate of 1% and a Shunto of 5.3% says they've got a problem.

So I don't think Japan is behind the curve.

I think Japan is aiming for a neutral policy.

This rate increase is getting it to a neutral policy.

Remember, Japan started this year with, I think, an accommodative monetary policy, and so with, uh, this shift you're moving towards a neutral policy, which is appropriate.

Unlike the ECB where the policy error was that they raised rates from a neutral rate to a very mildly restrictive rate when it's unnecessary and gonna have absolutely zero effect on inflation or inflation expectations.

What's happening in Japan I think is appropriate.

But there is the danger, isn't there, I suppose, that, um, that, that even as things stand, that there could be further inflationary effects, but, but the banks can't say for certain at the moment.

How is that gonna shape their perception of how high p- prices are across the economy, and how might it change their attitudes to spending?

Well, so this is where I think we need to make a distinction.

In, in the world of social media hype and sensationalism, the consumers are very focused on high-frequency purchases, and that shapes their political perceptions as well.

You know, we've seen, for example, President Trump's approval rating on the affordability crisis in the States is very, very weak, and that's reflecting this false perception that inflation is higher than it actually is because you remember the price of gasoline, you remember the price of the Snickers bar.

That's what shapes your inflation perception.

The reality is, however, that consumers are saying, "Everything's terrible.

Inflation is out of control," but they do still have the ability to go out and spend, and if an American consumer has the ability to go out and spend, they will go out and spend.

Do you see that behavior trickling out in something that companies are taking advantage of?

What do you see now the outlook going forward for central bank policy? And I guess I'm thinking particularly about the Fed and the Bank of England.

So the central banks, I think, are going to pause for the time being.

Now, the ECB was already on pause.

Masterful inactivity is one of the few things the ECB does really well.

So they were never going to be changing rates.

They're already, I think, at a neutral policy rate, or that's how they would regard it.

For the Fed and the Bank of England, this is a bit more interesting because those central banks at the start of this year were running repressive policies.

And then looking ahead, if we do see greater certainty of peace in the Middle East, particularly in the Gulf region and discussions shift to reconstruction and rearmament, do you see European and Asian companies benefiting most from this? And maybe you can talk about the broader implications such as the dollar's role and its status as a reserve currency.

Um, what do you see now the outlook going forward for central bank policy? And I guess I'm thinking particularly about the, uh, Fed and the Bank of England.

So the, the central banks, I think, um, are going to pause for the time being.

Now, the ECB was already on pause.

Uh, masterful inactivity is, is one of the few things the ECB does really well.

Uh, so they were never gonna be changing rates.

They're already, uh, I think, at a neutral policy rate, or that's how they would regard it.

Um, for the Fed and the Bank of England, this is a bit more interesting because those central banks, uh, at the start of this year were running repressive policies.

Uh, and then looking ahead, i-if we do see greater certainty of peace in the Middle East, particularly in the Gulf region, and discussions shift to reconstruction and rearmament, um, do you see European and Asian companies benefiting most from this? And maybe you can talk about the broader implications such as, uh, the dollar's role and its status as a reserve currency.

Are we making a storm in a teacup about the appointment of the chair, Paul?

So that's a difficult question because traditionally the Fed chair sort of does rule the roost.

The last time a Fed chair was outvoted was back in the 1980s.

when Paul Volcker was outvoted, and he immediately resigned as soon as he was outvoted by the FOMC on his choice of policy.

So the chair has tended to dominate in a way that perhaps the Bank of England governor doesn't, where forcing the Bank of England governor into a minority is almost a sporting event as far as the Bank of England's Monetary Policy Committee is concerned.

It's something they like to do every once in a while just to keep them humble.

So the Fair Chair has traditionally had this very, very dominant role.

But when I add that to the fact that Americans are beginning to be very concerned about the president's handling of the economy and his approval ratings are just slipping a bit yet again, Do you think that actually the median earner, the low earner in the United States is beginning to really suffer and there are problems there?

Yeah.

So, to the extent that, you know, one believes in the, um, far-sighted ability of bond traders, uh, then, you know, that's a signal of, of worries about the future.

Personally, I put my faith in the far-sighted ability of economists over traders, but, you know, whatever.

(laughs)

Uh, so there's a, an element there, is you're seeing that compression of the real yield.

It does, at the margin, help with, um, the sustainability of, of government financing, because if the real yield is coming down, what that is telling you is that, you know, tax revenues relative to interest rate costs are sort of shifting.

The revenue does a little bit better relative to the interest rate cost.

It's a fairly marginal thing, um, but it does help, particularly with, uh, a deficit as large as the United States now has and with the debt level that it has.

Are you seeing that at all?

So I think there are one or two economists who are seeking to justify what is happening, the US Treasury Secretary being one of them, and say, well, this is because it was unfair or because we need to do this.

I think there are certainly legitimate concerns that can be voiced about imbalances in the global economy, the scale of imbalances, the endurance of imbalances.

Personally, I don't think a trade imbalance is necessarily a bad thing.

It depends on the demographics of a country.

It depends on its stage of economic development and other factors.

So you can, I think, have a persistent trade surplus or a persistent trade deficit in goods for a long period of time.

So why do you think that markets still, even today, systematically undervalue inclusive talent? And what's the long-term cost to innovation in economies that fail to address this?

What are your kind of main muscle movement takeaways when you talk about tariffs? I've heard them, but maybe give us a brief overview of what you tell your listeners.

Well, so the first point is a very simple one.

We have got, roughly speaking, 4,000 years worth of history on the effects of trade taxes.

And they are a tax that is paid by the consumer, ultimately.

Now, that can be the consumer in the sense of a company that is importing components, or it can be the end consumer.

But these are attacks that are paid by the domestic consumer.

What we have got is essentially the direct effect of the tariffs, and that's not too complicated to calculate.

Any general thoughts on Japan from someone who is focused on that part of the world?

Do you believe that this administration is economically incompetent?

I think the problem that we have with the administration at the moment is essentially two things and yesterday's market moves really demonstrate this the first is that policy is very erratic there's no certainty about policy you know we we saw with um the taxes on colombian imports they were imposed and then you know hours later there's a full-blown retreat and they're all off the agenda again so that sort of thing creates this natural level of uncertainty And then the US system of government is now tending towards the imperial.

It all depends on the views of one individual.

And that means that only Trump can deny fake news rumors.

And if there are credible rumors about what he might be thinking, the market will go off in a certain direction.

Now, what's the problem with that? Well, one of the key problems with that is that whilst this creates volatility in financial markets, this level of uncertainty create serious questions about longer-term investment.

Do you want to build a factory in the United States if you have an erratic policy dependent on the wins of one individual? You don't have the certainty to make perhaps what is a 20, 25-year commitment.

Do you have sympathy with the view that actually something does need to change and the US was right to try and change the architecture, even if they've gone into this in the wrong kind of fashion?

So one, uh, you know, how, how valid is that particular argument, the dollar offset idea? But then secondly, why is it that the dollar actually goes up when the US announces additional trade measures? I don- I've kind of taken that for granted, and I've never stopped to actually think about why that's happening.

Well, let's start with the second part first.

So essentially, I think what is happening is traders are assuming that because the tariffs will raise consumer prices over a period of time, not all at once, that will then lead to a more cautious approach on the part of the Federal Reserve with regards to policy interest rates.

If interest rates don't go down so much, or indeed start to go up, that tends to be supportive for the dollar at a time when other countries are still on a, an easing trajectory.

So it's an interest rate differential expectation, generally speaking.

Does a stronger dollar help offset the tariffs? I mean, to a very minor extent, a stronger dollar will tend to lower commodity prices that are globally denominated in dollars.

But the issue here is that 95% of US imports are priced in US dollar terms.

[laughs]