Odd Lots Podcast – Episode Summary

Podcast: Odd Lots
Host: Bloomberg (Joe Weisenthal & Tracy Alloway)
Guest: Adam Posen, President of the Peterson Institute
Episode Title: Why Adam Posen Thinks Inflation Will Surge Back to 4%
Release Date: February 13, 2026

Episode Overview

This episode features a wide-ranging, in-depth discussion with Adam Posen about his forecast that U.S. inflation will accelerate and reach 4% by the end of 2026. The conversation explores his reasoning, the roles of labor market dynamics, tariffs, migration policy, fiscal stimulus, AI investment, and the shifting global economic order. Posen argues that the factors pushing inflation higher are underappreciated, while both the Fed’s transmission mechanisms and its credibility have weakened, raising the odds of persistent inflation. The episode also touches on geostrategic tensions and their inflationary spillovers, particularly for Europe.

Key Discussion Points & Insights

1. Changing Nature of Inflation Debates (00:36–02:17)

• Hosts’ Setup: The inflation debate has shifted from “how low and how fast will inflation fall?” to “will it fall or re-accelerate?”
• A blowout January jobs report (130,000 jobs added versus 65,000 expected) suggests ongoing strength, even as some sectors show softening.
• Commodities and freight indicators suggest reflationary pressures may be building.
• Adam Posen is introduced as a key out-of-consensus voice forecasting a reversal in the disinflation trend.

2. Why 4% Inflation? Labor Market & Policy Drivers (03:03–08:15)

• Adam Posen’s Core View: "I think it's realistic to think about 4% by the end of the year on headline CPI. And...I think the direction of travel is up, not down. And pretty clearly that way." (03:13)
• Labor Market: Despite some apparent softening (slower wage growth, increased unemployment among African Americans, less hiring among young college grads), Posen argues these are not cyclical demand-side slowdowns, but rather mismatches or specific sectoral effects.
  • Examples:
    • African American unemployment rise tied to government spending cuts in departments that employed many Black contractors.
    • Weak hiring of young people seen as COVID after-effects and hiring overhang, not overall weakness.

3. Breaking Down the 4% Forecast – Policy and Transmission Mechanisms (08:15–13:53)

• Inflationary Ingredients:
  • Tariffs & Anti-Migration Policy: Their full inflationary effects are still lagged and will likely hit harder soon.
    • "We never should have expected the impact of these policies to be so fast." (08:41)
    • Decisions by firms (changing suppliers, relocating production) and workers (migrants navigating enforcement) take time.
  • Fiscal Policy: Anticipated pre-midterm fiscal stimulus (checks, restoration of Obamacare subsidies) could add up to 2% of GDP to the deficit.
  • Weaker Dollar
  • Monetary Policy & Fed Credibility: The Fed faces “structural forces for change,” with credibility weakened by leadership tumult and political attacks.
    • "Regrettably, we have to take into account all the attacks on the Fed and the changes at the Fed...that makes the credibility...lower." (12:40)
  • Private Credit & AI Investment: Financing remains plentiful, especially outside traditional bank lending, muting tightening effects.

4. Are Tariffs Inflationary or Disinflationary? Conditional Effects (13:53–18:30)

• Joe’s Challenge: Tariffs are a tax—could they actually be disinflationary (removing demand) if companies can’t pass on costs?
• Adam's Response:
  • It depends on the competitive landscape and sector specifics.
  • The inflation pass-through is “conditional on demand”; if demand is strong, companies can pass on costs.
  • Tariffs and migration shocks are interactive with overall economic conditions.
• Memorable Quote: “It is going to vary from company to company. And my argument was just that...it's not a trivial decision. You don't just go..." (15:30)

5. Will This Be a One-Off Inflation Shock, or Durable? (18:04–21:53)

• Tracy asks if 4% is just a blip.
• Posen asserts: It’s the start of a durable cycle. Supply shocks have more persistent effects in a high-pressure economy with increased fiscal fuel and weakened monetary credibility.
  • Migration shock (driving out workers): Potentially 4–6x the inflation impact compared to tariffs alone.
  • Cites historical parallel with the 1980s: after high inflation was only partially stamped out, it returned higher and more persistent.
  • "If you fail to stomp it down, the anchoring...of inflation expectations is lower." (22:31)

6. Loss of Central Bank Credibility & Transmission Weakness (21:53–24:46)

• The longer inflation is left above target, the more persistent expectations become.
• Key Research: Empirical evidence shows that not taking inflation all the way back to target creates future inflation risk.
• Traditional signals (U. Michigan expectations) may underplay the danger—people only notice inflation when it hits.

7. How Monetary Policy Transmission is Eroding (24:07–29:34)

• Less Power for Rate Hikes:
  • Only 1 of 3 textbook transmission channels (yield curve) is reliable; the effect on bank lending and on expectations is diluted.
  • Housing construction is less sensitive to rates than in the past.
  • Proliferation of private credit—outside regulatory control—limits policy traction.
  • "There's good reason to think that none of these effects will be as powerful bang for your rate hike as it used to be." (29:13)

8. AI Investment Boom—But Not More Broadly (29:34–36:04)

• AI spending is “GDP-altering,” self-financed, and not credit-constrained.
• Ironically, no investment boom is seen outside AI despite favorable policy—Posen blames policy uncertainty, especially from tariffs and migration, not tight credit.
• Productivity effects from AI take time: income gains come first, disinflation only later, echoing the experience with '90s computers/internet.
  • "If I were a central banker...I think you're going to see the real income effects in the next couple years predominantly and not so much the disinflationary effects..." (35:31)

9. The Treasury Accord Debate and Risks to Independence (36:04–42:11)

• Tracy asks about proposals to tie the Fed’s balance sheet to Treasury debt management.
• Adam’s sharp response: "No." (36:46)
  • Central bank independence—especially not buying government bonds directly, and avoiding rapid leadership turnover—is essential to restrain inflation.
  • Historic data: two things predict inflation-prone central banks—lots of leadership turnover and central banks buying government debt.
  • Attempts to solve structural fiscal issues via short-term financial engineering (“bridging your monthly credit card bill”) are dangerous.

10. U.S., Europe, and the “New Economic Geography” (42:11–51:57)

• Joe asks about European leaders’ responses to U.S. shifts in foreign and economic policy.
• Posen argues the global order has fundamentally changed:
  • Even if future U.S. leaders wish to reverse Trump-era changes, trust is broken—other countries can’t take U.S. support for granted.
  • This drives investment hesitation and rethinking of strategic partnerships (e.g., Europe exploring deeper self-reliance as U.S. is no longer the “insurance provider”).
  • Security and macroeconomic issues have merged: defense spending, “reshoring,” and strategic autonomy are inflationary.
  • Notable European moves: a potential “leadership committee” for major EU countries to act more quickly in a post-unanimity world, especially on defense.

11. Macro-Security Nexus & The Inflation Backstory (51:57–55:50)

• A “new normal”: Security issues now material influences on macroeconomics.

• Large-scale spending on defense, infrastructure, and strategic autonomy feeds inflation.

• The hosts reflect: Are the latest signals a durable uptick or a temporary inflation blip as inventory restocking and tariffs filter through?

  • "To me we are seeing some inflationary signs, right...I guess the big question is how much of this is a temporary like blip...or is this the start of something that's kind of...durable." — Tracy (53:35)

• Fed policy risk: Rate cuts into a re-accelerating economy are dangerous, especially if the new Chair feels pressure to cut rapidly.

  • "If you have this sort of rate cuts into a period of we're actually seeing reacceleration, that's like a very different story." — Joe (54:44)

Notable Quotes & Moments

• Adam Posen on 4% inflation:
  “I think it's realistic to think about 4% by the end of the year... I think the direction of travel is up, not down. And pretty clearly that way.” (03:13)
• On the Fed's weakening grip:
  “...the credibility, the likelihood that they're going to react in the right direction to this inflation soon enough—lower. So boom, boom, boom, boom, boom, boom.” (12:40)
• Why AI will not trigger immediate disinflation:
  “...you get the real income grains up front and you get the disinflationary part later...it's primarily real income gains initially.” (35:31)
• On central bank independence:
  “The idea that there should be an ongoing accord [Fed-Treasury] as opposed to, say, an emergency response...is what's [dangerous].” (36:48)
• On the new global order:
  “At this point, nobody believes it's going to turn around, or at least nobody believes it's going to turn around sufficiently and last in a way that the Europeans can count on whoever's next.” (48:00)
• Macro meets security:
  "It is very telling about our current moment...that we're talking about the Munich Security Conference as like a macroeconomic [event] at all." — Tracy (51:57)

Timestamps for Key Segments

• Labor Market Analysis & Data Mismatches: 03:03–08:02
• Inflationary Pressures (Tariffs, Migration, Fiscal, Monetary): 08:15–13:53
• Do Tariffs Require Strong Demand to Be Inflationary?: 13:53–18:30
• Will 4% Inflation Persist?: 18:04–21:53
• Does Monetary Policy Still 'Work'?: 24:07–29:34
• AI Spending & Investment Puzzles: 29:34–36:04
• Risks from Fed-Treasury Coordination: 36:04–42:11
• Europe, U.S. Hegemony, Strategic Uncertainty: 42:11–51:57
• Macro-Security Nexus Reflections: 51:57–55:50

Tone and Style

The episode maintains an analytical, candid, and sometimes wry tone. Posen offers data-rich arguments and uses historical analogies, while the hosts keep the conversation accessible, occasionally injecting humor or relatability (e.g., Super Bowl snack inflation).

Conclusion

Adam Posen paints a persuasive, if unsettling, picture of why U.S. inflation could reignite and persist at a higher level, driven by policy choices (tariffs, migration, fiscal stimulus), shifts in labor and credit markets, weaknesses in monetary transmission and central bank credibility, and a new global strategic context. The episode closes by reflecting on the interconnectedness of security and macroeconomics—a new reality where previously “temporary” inflationary shocks could prove much more durable.

Recommended for:
Anyone seeking a forward-looking, macroeconomic deep-dive into why inflation might surge anew—and why policy reactions might fall short.