Central banks agree on one thing it's not over yet when you have your inflation outlook up, your core inflation up.
We've all looked around and we've seen that prices are too high.
It's world business report from the bbc world service.
I'm Sam Fenwick coming up today.
While Europe and America's top bankers are still worried about inflation and what's actually driving it, why the Gulf oil industry will have to build back better to secure supply chains.
And as one of California's own becomes a trillionaire, the state votes on taxing exactly that kind of wealth.
2.8%.
That's where euro area inflation landed on Wednesday, down from 32 in May, below what economists expected the first monthly fall in prices all year.
Now, three weeks ago, the European Central Bank raised interest rates for the first time since 2023.
Its president, Christine Lagarde, told the ECB's annual gathering of central bankers in Central Portugal why.
When you have your inflation outlook up, your core inflation up, when you have the underlying inflation indicating that it's also trending up as well and that you're only going back to your 2 target at the end of 28.
With a number of things happening in our inflation outlook, which includes the market expectations in particular, you have
The obvious decision, and it was so obvious that we had a unanimity decision within the Board of the Governing Council.
Sitting beside her, the new US Federal Reserve Chair, Kevin Walsh.
He said that Washington sees exactly the same problem.
I'll reinforce something that President Lagarde just said.
We're all in the price stability business.
That might not be our only business, but if there was a common thing I heard over the last couple of days, it was open-mindedness on these questions of AI, open-mindedness on productivity.
But we've all looked around and we've seen that prices are too high.
And I don't think I'm the only one on this stage that's recommitted to deliver price stability.
So two central banks there, same warning, but the ECB isn't expecting this to be fixed until the end of 2028.
So does one good month change anything?
Well, to make sense of this on both sides, we're joined by two experts on both sides of the Atlantic.
Susan Schmidt is Portfolio Manager at Exchange Capital Resources in Chicago in the US.
And in London, we're joined by Ella Hoxha.
She's Head of Fixed Income at Newton Investment Management.
Let's start first of all with Susan.
So Kevin Walsh there, we haven't heard much of him.
This has been his first kind of international outing.
He says price is still too high.
What's actually pushing it right now?
And what are Americans paying more for?
Well, the world, I think, is paying more for gasoline petrol, as you would say, and just general price increases because of the concern over the price of energy due to the conflicts in the Middle East.
So, Ella, prices in Europe actually fell, though, last month.
So what changed there for those consumers?
Yes, actually, the energy basket is perhaps where you saw the biggest drop.
So we went from 10.8% last month, also in May, I guess.
It's July now.
So we went to 8.7%.
So quite a big drop there on the back of tensions in the Middle East easing off.
So services also fell a little bit, but the biggest contributor was certainly energy.
So is the point that the European Central Bank has acted more quickly than other central banks in increasing interest rates and therefore, sort of you know, putting the brakes on this a bit quicker than others.
Absolutely.
I mean, they were scarred by the experience of 2022, you know, when inflation significantly shot up.
And, on top of it, they have a single mandate as a central bank, and that is to have inflation at or around 20, the 2 level, whilst the Federal Reserve of the US also has a second element to its mandate and that's to keep employment, you know, at pretty opportune levels.
Susan, I watched the panel discussion this afternoon between all the central bankers and Walsh was pushed quite a lot on what guidance he might give.
What might the Fed do next?
He's absolutely keeping it zipped.
Is that discipline or does he just want to leave everyone in the dark?
Is he kind of, you know, making sure the markets don't respond?
I think a little bit of both.
He was very negative on the open communication and the signaling that he felt was happening under Chairman Powell.
And he's just taken the helm even in his first meeting.
He was very quiet and reserved and giving no inclination whatsoever as to the forward moves the Fed might take.
So he's playing it coy.
I think he's also trying to set the path for the new Fed in the US with the new Fed chair and really trying to keep the markets just in the dark.
Now, the ECB, Ella, it's not expecting to hit that 2%, that magic number, that target of what central banks want to have inflation at by 2028.
It doesn't think it's going to get there.
But down then in June, what might happen next month?
Can we really judge anything by what's just happened, this slight drop?
Yes, I mean we can expect some more benefits from this drop in energy because, as we know, everything we do is driven by energy, right?
So it has an input into all kinds of costs in our daily lives, in our daily activities.
And so you can see a continued compression coming on the back of that.
Now, of course, that assumes that the price of oil stays stable at these lower levels, which are now matching the pre-conflict levels.
So we can see a continuation of that benefit over the course of the next month.
And of course, there's also the element of expectations, right?
So if expectations in markets continue to remain benign from here on, that will also feature through in terms of pricing this in markets.
So you can get some of that benefit come through next month also.
We've talked a lot on the programme about the longer-term impact of this energy shock on things like fertiliser prices, food prices possibly not being seen by the consumer until the end of this year.
What do you think about that?
Of course, that's...
Apologies, sorry.
I'm assuming that was to be.
Yes, absolutely.
I think this is the second element that we do not see, but it's likely to feature through later on.
And this is what's keeping the central banks much more cautious going forward.
So they're not calling this quits despite the improvement on the geopolitical front.
Susan, we're saying that Lagarde expects Europe not to make its inflation target until the end of 2028.
What do you think the Fed might look like?
What's their sort of timeline?
Well, based on the most recent meeting, we have seen the Fed governors vote and indicate that they think that there need to be considerations for an interest rate increase.
The US consumer remains strong, and that is part of the problem for the Fed, because that purchasing power hasn't diminished even though prices continue to rise.
I think...
Chairman Warsh now is looking forward trying to figure out how to best balance this.
He has a good thing going for him in that with his dual mandate he is seeing strong employment levels and that continues to give him some support should he have to counter inflation with higher interest rates.
Interesting.
It's one to watch, isn't it?
Susan, you're going to stay with us for the rest of the show.
But Ella Hoxha, thank you very much for joining us.
Head of Fixed Income at Newton Investment Management joining us today from London.
Well, one of the big drivers behind...
All of this, as we've been saying, is oil.
Brent crude's been swinging around again today.
Up on fears the Doha peace talks are stalling.
Down on signs that oil is actually beginning to flow again through the straight of Hormuz.
The market can't seem to decide what story to believe.
Majid Jafar runs Crescent Petroleum, one of the Gulf's oldest oil companies.
I asked him to what extent his industry is now returning back to normal.
What we've seen in the last day, the last I checked, we had about 25 ships coming out a day.
And that's a lot lower than the 100 plus that used to before the war.
So oil is coming out, but nowhere near back to normal.
I think the market perception reflects the expectation that there isn't a desire for all-out war by the US and by Iran.
Again, there's that degree of hope.
But it's far from normal as far as supplies.
There's an aspect of demand being well down, China and other countries in Asia.
And U.S. supply picked up a lot during the war.
So there's a sense that perhaps the market could be well supplied as long as things head back towards normal, however long that takes.
But it's still far from normal.
The whole regional oil and gas sector has suffered this shock and for years we've been investing for efficiency obviously, and looking at costs.
Now I think there's going to be a lot more investment in resilience, building redundancy and options at every part of the value chain to deal with shocks.
Because this isn't our first shock.
I mean you can think that you had COVID as a shock.
You know, had the Ukraine war as a shock?
Affected Europe mainly.
And this one now was another real wake up call and showed how important the region remains for the global economy.
When gas production in particular was hit, when gas was sort of switched off because of this, because it couldn't get out of the Strait of Hummus, it was the Americans that kind of came in to plug the gap.
What happens now in terms of the market?
Has there been a kind of rebalancing?
How do you gain that market share back?
LNG in particular, I think what you're talking about, liquefied natural gas.
We already saw that with the Ukraine war, US LNG taking the place of Russian gas in quite a big way in Europe and indeed stepped up with LNG exports when countries like Qatar could no longer export.
And LNG is harder to pipe out of the region.
But there's now a sense that even if ships are passing, whether or not there's a toll, it still seems to be unclear.
There is now a risk on the Straits of Hormuz that wasn't there before and that has to be factored in.
So there will be adjustments and different kinds of investments to deal with that.
How much is it going to cost you, do you think?
For the region as a whole?
For you as your business?
For us, we've been faced with rising security costs, insurance impacts for some time now.
There is a higher perception of risk.
However, also the importance of the region for all of these different sectors, key fuels for the global economy, has also been recognized, which it hadn't been, I think, before.
I mean, it's really clear now that energy is the lifeblood of the global economy.
You've made the bigger point that it's not just about petrol and oil.
It's also about food, fertilizer, shipping.
Who is most exposed?
I think everybody, I mean if you had said, because of a war in the Gulf, people here in this country would be worried about whether they'd be able to go on holiday this summer because of lack of jet fuel.
It's really everything, the cost of the food on the table.
The second and third order impacts are beyond what most people expected, even people from the region and from the industry like myself.
And it's still playing out.
It'll take a long time, I think, to see the full impact and to see the recovery.
We're not going to get back to how we were before this conflict.
There'll be a new reality and what that is, we'll have to see.
Just today, the UAE, which quit OPEC two months ago, has posted record oil exports.
So a producer walks away from the cartel and immediately starts pumping more.
Is that proof that the market was right all along, that oil will keep flowing whether there's OPEC or no OPEC?
So I think, I mean, the UAE made clear its reasons.
It has capacity to go further.
Iraq has said recently.
Iraq in particular has suffered fiscally more than even the GCC states because it doesn't have the depth of savings.
And it was exporting nothing and it was living month to month.
So it was in real crisis.
But OPEC Plus has been there, very effective in stabilizing oil prices and even cooperated with the US during COVID.
You remember when prices went the other way.
You know you're going to continue to see cooperation on management of production levels and pricing.
The immediate issue is Even if tankers are leaving the straits, these are tankers that have been stuck there since the beginning of the war.
It's very different from new tankers going back in to lift more oil.
We've had a ceasefire that barely lasted a week and it's clearly pretty tenuous or fragile, and we get announcements in both directions every single day.
So what is it going to take? for ship owners, insurance companies to send ships back in to lift, whether it's crude, LNG, all these other products.
That's the big question.
I mean, negotiators will be meeting in Doha.
If talks do happen over the next week or so, what's the sort of thing that you would want to come out of them?
I don't think there's an expectation of a big complete and quick breakthrough.
I think there's general expectation, in the industry at least, that even the 60 days is going to be extended.
We've seen all sorts of – well, you've reported on all sorts of different interpretations of who's going, what they're meeting about, what's been agreed, what's not been agreed.
This is the first time that every country in the Middle East, I think without exception – was attacked at the same time and suffered during the war.
I'm still very optimistic on the future for our region and its potential not just in fundamental energy sectors, but also in new technology sectors.
But there will have to be a lot of investments made, whether it's in resilience, in infrastructure and new realities that will emerge after this crisis.
Majeed Jafar there from Crescent Petroleum, an oil and gas producer in the Middle East.
You're listening to World Business Report from the BBC World Service with me, Sam Fenwick.
Now, earlier this week, Elon Musk became a trillionaire again on paper on a Tesla and SpaceX rally.
Numbers like that move day by day.
So don't treat it as gospel.
It's a bit of a snapshot.
In November, the state he made much of his fortune in votes on whether to tax wealth like his.
A one-time 5% tax on all Californian people worth more than a billion dollars.
Around 200 people would end up having to pay it.
Supporters say it could raise $100 billion for health care and schools in the state.
Those who oppose it say that actually the state will lose money overall as wealthy residents move away to avoid paying it.
The idea was proposed by the United Healthcare Workers Union.
The president is Dave Reagan and he says that they've done it to fill the gap left by cuts to federal healthcare.
We put the billionaire tax on the ballot because we're asking the billionaires to pay a modest one-time emergency tax.
And this is a five-year solution.
We have never tried to say that it is a permanent solution.
It's not.
But it will solve the problem for five years, which will give us enough time here in California to figure out a long term policy through the legislature and with the future governor.
The 250 billionaires in California collectively have $2.2 trillion worth of wealth.
It has grown by over 200% in the last three years.
And each billionaire.
Each of the 250 people can choose to pay in a one-time lump sum or can pay 1 a year for five years, whichever they prefer.
Is it really fair to expect these individuals to pay in this way?
I think it's more than fair.
These are people who have overwhelmingly made their fortunes in California.
These companies that have all benefited from the public education system of the University of, They've benefited from the workforce in California.
And again, these are people who have made over a 200 percent return on their wealth in the last three years.
And this will not even get the billionaires you know being close to what nurses and accountants and teachers are, and firefighters pay in their regular tax rates.
Some billionaires have moved, haven't they?
They've moved out of the state and there are some people concerned that actually the state will lose money through tax revenue.
There's a handful, literally a handful of billionaires who claim they have moved.
This is a subject that's been studied by economists all over the world.
The ultra wealthy frequently will move.
You know, say they're going to move to avoid taxes, but their behavior is something very different than that.
But nonetheless only a handful.
Literally four or five billionaires have said they're going to leave.
The second point is the tax will be levied against all billionaires who were legal residents of California before on January 1 of 2026.
And, as a practical matter, even the handful that have said they're going to leave were legal residents on January 1.
The third thing about will we lose revenue?
The answer is absolutely not.
This is a one-time tax. that will yield $100 billion.
All of the billionaires collectively pay $3 billion a year in income tax in California.
So if every single one of them left, we would have more money to fund our healthcare system for the next 35 years.
And nowhere near that number is going to leave.
And the truth is the most conservative assumption you could make, which is that a third of billionaires will leave.
This will create more funding for health care, for health care coverage for children for the next 100 years.
So that was the case for.
Let's hear the case against put forward by Rob Lapsley.
He's president of the California Business Roundtable.
The authors wrote this proposal to not target our highest income earners.
They actually are targeting everyone.
The legislature can change this proposal forever, at any time, to lower the tax targets to any and all Californians.
The bottom line as well is that California has a spending problem.
We don't have a tax problem.
Our spending has gone up over $150 billion in the last six to eight years.
So California has plenty of money, but they're utilizing this tax just to get more money for what they say the healthcare system needs.
Well, what that means is it's really the union's who are trying to exercise control over the healthcare system.
California has a $350 billion budget now.
And so we have the ability and are taking care of our health care costs.
We do not need this as well.
So what happens if it passes?
What do you do?
Do you leave, restructure, just cough up?
Immediately it's going to be challenged in court.
We have already prepared all the legal arguments.
It will probably go to the U.S.
Supreme Court.
But we absolutely believe that it will be held unconstitutional, based on the way it's drafted and what it does.
It makes people sign an affidavit, all Californians, on what their assets are.
It's the greatest intrusion of tax policy that exists in this country today.
Some would say that opposing a tax on the ultra wealthy when you're not exactly struggling yourself is just a really hard sell for ordinary voters.
Yes, that is some of the conventional thinking.
And the conventional thinking is actually not the reality.
We've beaten back a lot of major tax increases over the years.
When the voters look at them and say at the end of the day, you know, They may say these people are paying it, but at the end of the day I'm going to be paying it.
And so this is just another example.
The legislature can change this measure.
They can make everybody pay it.
People are smart out here when it comes to this.
And even the more recent polling shows that we can absolutely unequivocally defeat this measure in November.
But most importantly, when you look at this, They're going to leave.
They're already leaving.
It's going to put our state in a deficit spending situation in the future of over 25 billion a year.
The unions say that's a red herring.
They say that people aren't really going to leave Upstix and leave their homes just so they can't pay this tax.
And I've heard that loud and clear.
And then we have talked to the people who have already left, some of the biggest people in California.
And we have talked to the people who are preparing to leave.
I so there that that's absolutely wrong.
But the reality is these are the people we deal with because they are the greatest impact on California's economy.
They're the innovators.
And so we are talking to them every day and they're leaving unequivocally.
Robert Lapsley there, president of the California Business Roundtable.
Now finally tonight, we're going to have a look at this story about trucks, trains and ships moving about 2 trillion worth of goods across the borders between the US, Mexico and Canada.
All of it was once protected by one trade deal.
Today, however, was the deadline for that trade deal to be renewed and Washington said no.
So what might be the consequences of that decision?
Susan Schmidt is still with us.
What are the consequences?
How big a deal is this?
Who wins?
Who loses?
Well, I think at this point, we see that President Trump is back in his negotiation mode.
Anytime there's a deal, he wants to renegotiate it.
He said no, this means that they will continue to discuss this and they can discuss this for another 10 years before we really run out of this agreement.
In the meanwhile, I expect that we'll see a lot more discussion back and forth, just as we did with tariffs on trade how much it will cost tariffs?
Again, President Trump is trying to reduce the trade deficit for the US and move manufacturing into the US.
So this is going to be, I think, a hot topic for him, especially as we come up for midterm elections.
And this is going to be an area where he wants to show strength and continue the fight.
It's really a replay for the markets of what he did with tariffs.
So Trump says that America doesn't really need anything from Canada or Mexico.
Is that really true for U.S. businesses?
Is Susan still there?
We seem to have lost Susan.
Hello, Susan, are you still there?
Well, we seem to have lost Susan there, so we'll move on.
Because also today, Washington is easing up on one of Silicon Valley's biggest AI firms.
Anthropic can bring its most powerful public model back online worldwide after an 18-day standoff over national security controls.
A more restricted version stays limited to vetted U.S. organizations for now.
Well, thank you very much for listening to World Business today.
World Business Report.
Thank you very much to our guest, Susan Schmidt.
She made an early exit.
Thank you to you for listening.
Don't forget, you can always get our podcast search for World Business Report wherever you get your BBC podcasts you.
