Why central bankers face an inflation reckoning

**Peter Thal Larsen** (0:03)
Central bankers are determined to win the fight against inflation. Hardly a day goes by without another policymaker making a speech about the dangers of another burst of rising prices due to the war with Iran. The same time, though, central bankers are being forced to defend their independence from politicians, leading example President Donald Trump, who want lower interest rates.
My guests today argue that central bankers are fighting a losing battle. They believe that the period, the long period of falling and low inflation, which started in the 1980s and stretched right through the 2010s, has come to an end. Aging populations, highly indebted governments, and geopolitical fragmentation mean that higher inflation is here to stay. And that means central bankers have lost their compass. So today on The Big View we are going to talk about central banks and their fight against inflation. It's what we do at Reuters Breakingviews. We tap our best sources around the world for fresh insights into the biggest topics in economics, business and finance. I'm your host, Peter Thal Larsen.
Today, I'm delighted to be joined in the studio by Charles Goodhart and Manoj Pradhan. Charles is one of Britain's leading economists. He worked for the Bank of England for almost 20 years, and was one of the first members of its Monetary Policy Committee after the Central Bank was awarded its independence in 1997 He also coined the adage now known as Goodhart's Law, which is that when a measure becomes a target, it ceases to be a good measure. Manoj is the founder of Talking Heads Macroeconomics, an independent research firm based in London. He was previously Managing Director at Morgan Stanley, and before that, an academic economist. Charles and Manoj have recently published a new book, The Unanchored Central Banker, Demography, Fiscal Instability, and an Erosion of the Central Bank's Inflation Fighting Ability, which is a follow up to some of their previous work on demographics and ageing societies. They join me here in the studio in London, Charles Goodhart and Manoj Pradhan. Welcome to The Big View.
Maybe Charles, if I can start with you, the central question, I think, of this book and of the previous book, which is really about demographics and the effects of worsening demographic situations.
Can you just, in a nutshell, explain why do ageing populations lead to inflation?

**Charles Goodhart** (2:41)
It's because the young pay the taxes and the old need care and support, which is very expensive. When there are fewer young and more old, the fiscal position gets a lot worse.
The fiscal position in all our countries has been getting worse, very rapidly.

**Peter Thal Larsen** (3:01)
Slightly cheekily.
I did check before we came in. I believe I'm right in saying you're going to be 90 this year, Charles. You're sitting here doing podcasts. I mean, is this not part of the answer to the future is that everybody works longer and that somewhat mitigates the effects of having an ageing population?

**Charles Goodhart** (3:24)
Alas, no.
Let me give you two personal examples. My wife died last October having had 10 years of increasing severe dementia. My older brother died about eight years ago out of Alzheimer's, and he needed care and support. And so two of the closest people I love more than anywhere else have died effectively of dementia. And my experience, I'm afraid, is not unique. Too many people, too many of us, and increasingly in future, will know someone very close to them who is going to become incapacitated by some kind of neurological disease.

**Peter Thal Larsen** (4:13)
Because that was the other thing I was going to ask about is, I mean, there are some quite significant medical advances going on. Not, I accept, with dementia and Alzheimer's. But if you think about what's happening in terms of anti-abesity drugs and stuff, that's quite revolutionary.
Presumably, that is potentially helps people live productive lives for longer, does it?

**Manoj Pradhan** (4:37)
Well, the data hasn't yet proven it. Of course, things can change and you can get technological breakthroughs and medical breakthroughs. One of the other things that we have mentioned in our book is, a lot of the diagnosis and checking of medical data probably gets done a lot better with AI now. So some of those improvements could be there. However, embedded in the concept of healthcare cost is something that we had mentioned in the book, which is Baumol's cost disease.

**Peter Thal Larsen** (5:05)
Can you explain that?

**Manoj Pradhan** (5:06)
Yeah, it's a cute story behind it. Baumol was studying the economy of the arts and the question that he had was, why should a string quartet be paid a penny more than they were 100 years before?