In this week’s episode of CNBC’s “Squawk Box,” former IMF chief economist and professor of economics Ken Rogoff said that “the underlying CPI, the root cause of core inflation remains pretty strong” and that there is expected to be an upward push on real interest rates for an extended period of time. One reason for this is the fact that “whatever takes place with the green transition, that is going to incur expenses.”
According to Rogoff, “I believe the most significant element is actually the unemployment and looking at the employment data, because finding out what production is, really asks us how do we recalibrate what occurred after COVID? We could have seen a temporary downshift in our potential, and it may be recovering as a result. It’s quite difficult to determine, although the employment statistics have been declining. I believe that the ratio of available positions to job seekers has been falling as I look at more microeconomic data. In other industries, like the computer industry, it is extremely weak. So, we see some indications of waning. But, the global underlying CPI and core inflation are still rather high, so it doesn’t seem like we’re anywhere close to this. And I must add, I believe the Fed will have more issues over the next ten years, not only now since we live in a time when there are several factors driving up prices and China is slowing down and many demands to increase expenditure. Therefore, I believe the Fed will be more inclined to permit inflation in the next decade than it was in the one before it.”
“They are not going to say they are giving up on getting back to the earlier 2% inflation,” he said. “They’re going to eventually say, Yes, that’s our long-term objective, but we are going to take it down,” in my opinion. “Although there have been several pressures for real interest rates to rise since COVID, I don’t believe they will abandon it. Beginning with the fact that debt is much larger, even with this agreement, demand for increased military expenditure globally is stronger, and whatever the outcome of the transition to a greener economy, it will be expensive. Republicans will lower taxes if they win the election, populism. Democrats will increase spending if they take over the government. Real interest rates are under a lot of pressure to rise. They won’t disappear anytime soon, in my opinion. From 2012 to 2021, real interest rates were very low, and I believe that during the next ten years, they will rise by about 1.5% or 1.25%.”
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