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- [00:03]
Robert Peston
Impact of Trump's war is on every central bank's mind. I think the likelihood is that interest rates will go up a bit at some point. The bank of England is split.
- [00:14]
Steph McGovern
The Greens obviously are expected to do well in these elections. The view is because the Green Party want to increase taxes and public spending, the bond markets will be like, well, hang on a minute, how are they going to pay for all this? How are they going to do all this?
- [00:26]
Robert Peston
A way will be found to get Starmer out. If they lose significant numbers of seats to the the Greens, the logic to fight back will be to move the government to the left.
- [00:37]
Steph McGovern
We're delighted to say that this year the rest is money is being powered by octopus energy. So Greg is back with us. Greg, I've got another question for you. So in terms of energy companies, are we just back to the big six?
- [00:49]
Robert Peston
You know what, we've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition. You've got differentiation. You know, we thought the market was stable, then Aldi and Lidl turned up. Competition is not about reinventing the souk with dozens of identikit companies. It's about companies having different approaches to looking after customers and competing ferociously on that. Energy could well be going that direction.
- [01:17]
Steph McGovern
Well, cheers, Greg, and thank you for powering this episode of the Rest Is Money. Hello and welcome to the Rest Is Money.
- [01:34]
Robert Peston
With me, Steph McGovern and with me Robert Pester. We've got an action packed show. We're going to kick off with the outlook for interest rates as the fragile ceasefire in Iran and the strait of all moves breaking down oil price back at record levels. What does that mean for the price of money in the uk? We're also going to look at those incredibly important local elections and elections in Wales and Scotland and how bond markets, markets will react and whether, you know, in effect, bond markets are going to determine who's in charge after local elections. And then finally, having had that discussion with Tom Blomfeld of Monzo about how AI was going to destroy all jobs, there are a lot of people around saying actually AI is going to create jobs. So we're going to look at those arguments. What is the bank of England saying about the outlook for the rate of interest we all pay?
- [02:28]
Steph McGovern
Yeah, so it's interesting this. They have done a forecast and this is the first one since the Iran war broke out. And it's essentially looking at three scenarios of how the war, how the unrest in the Middle east, the Energy and oil prices will hit the UK economy and they all center around how long energy and oil prices stay high. Now the bad news is none of them are good and they all involve living standards getting worse. But there's different levels of severity in terms of the impact. So they've done this as, as A, B and C now is the, the mildest outcome. So where energy prices will fall back sooner rather than later. Inflation will peak at about 3.6% by the end of the year. And although that's not ideal, it won't lead to any kind of spiraling. And what I mean by that is households and firms changing their behavior. So people asking for pay rises or spending less because they've got less money, or firms putting up prices because they're paying higher cost. So in that first scenario, it's likely these second round effects won't be as strongly felt. So things will kind of get back to normal sooner, although inflation will still go up. The second scenario, B, that's the most likely one is what the bank of England is saying. And this is where oil and gas stays higher for longer, so therefore pushing inflation again higher this year. And you know, those second round effects could be firms passing on cost to consumers, then them having less money. And then that could mean, you know, demand for things, things falls and then people might let go of employees. So unemployment could rise. But then that could mean inflation isn't hit as hard because then obviously if people are demand is lower, then prices can come down. But equally you might get people asking for higher pay. But that again is, is not as dramatic as the third scenario. So that's the one that the, the bank of England thinks is most likely. And we'll talk about after I've told you about the other scenario, what that means for interest rates and things in a minute. The worst case scenario C is that oil stays high for a sustained period, gas prices, for example, double the wage price, you know, spirals. And the result, the end result will be inflation rising to 6.2% in 2027 and you know, interest rates having to go up because of that. And we'll talk about that in a minute. But basically it's, this is all dependent on how long oil stays high for and what that means for energy prices and therefore the impact on everyone else. Because people, the longer this goes on for, then the more likely people will change behaviors because of it. And that is what the bank of England are trying to work out is, is what happens. But what Robert, I'd love to know what you Think on this. This then impacts, doesn't it? This is what they do when they sit in this meeting, this Monetary Policy Committee, then sit in the meeting with all this data and try and work out what does that mean interest rates. And we know from the last meeting that they've been held for now at 3.75%, there was one, one of them, Hugh Pill, who voted for it to go up to 4%, but he was outnumbered by the others. But there is a chance that in these second and third scenarios, interest rates would have to go up. Robert, what's your take on it?
- [05:52]
Robert Peston
So, yeah, on the scenarios, as you say, scenario C, interest rates would definitely rise, and scenario B, they would rise a bit. Scenario A is consistent with something we've talked about on the show, which is interest rates, which frankly, by recent historical standards feel high. A bank rate of 3.75%, that would be just held, well, just held, but it would be held for the rest of the year. I mean, that, I mean, we should just remember that is still a significant shift from what was expected to happen to interest rates before Trump's war in Iran, because before Trump's war in Iran, we were expecting interest rates to fall by perhaps a half of a percentage point. So as a result of Trump's war, we are already paying more interest than would otherwise be the case. But under scenarios B and C, we would pay a lot more to borrow than would otherwise be the case. Certainly, if you look at the behavior of markets, markets are now expecting not massive interest rate rises, but nonetheless interest rate rises in the UK between now and the end of the year. And although the pressure on interest rates to go up is probably greater in the UK than elsewhere, this is now a global phenomenon. The inflationary impact of Trump's war is on every central bank's mind. And at least for a period, we appear to be at the end of the interest rate cutting cycle, which for many businesses and many households, will one, be painful. But B, this is something that you, I know, get pretty exercised about, will be sort of inexplicable, because, of course, the truth is that when you get an inflationary shock of this sort, when commodity prices, oil prices go up, we're expecting food prices to go up as well, particularly as fertilizer, which is dependent on oil feeder stocks, fertilizer becomes in the short supply. We're expecting food to become more expensive. That increase in the cost of living makes everybody poorer. And so for many people, just inexplicable. Why the bank of England would want to make poor households who borrow poorer still in the circumstances where there is this shock to the cost of living,
- [08:39]
Steph McGovern
it's always the law income house households that are the most exposed when inflation goes up, particularly food prices and energy prices because that's where they spend more of their income on essentials. So this again will hit the, the poorest hardest. And, and as you say that point, I, I kind of slightly whooped when I saw this in Andrew Bailey's obviously the governor of the bank of England's comments. He said, he said about like what's happening now, there is nothing monetary policy can do to stop the cost increases. And I was like, yes, you've, I mean, I know in the longer term it can, but in this moment if you put up rates, you would just hammer people more and it wouldn't bring down energy prices. I know there's an argument of in the longer term it might make a difference, but it just feels like it's that the people are hit unfairly when they're trying to control inflation.
- [09:33]
Robert Peston
I mean, look, the judgment that the bank of England has to make, and one of the things that was very striking reading the minutes of the bank of England's meeting is quite how divided members of the Monetary Policy Committee are on the potential inflationary impact and the worry for the bank of England, when you have an increase in prices of this sort, if there is not enough so called slack in the labor market, workers demand higher wages, higher salaries and that then forces companies to raise prices again and you get into this inflationary spiral. Those second round effects are the impact of higher food and oil prices on what people are paid. And that is what the bank of England wishes to bear down on. Because there is a lot of history that when inflation gets in the system in that, in that kind of way, it undermines investment, it undermines growth and over time everybody gets poorer. Which is why the bank of England's mandate is explicitly and solely about keeping inflation as far as it can at the target of 2%. But as I say, it is very interesting. I mean, what I would say about where we're heading, I think the likelihood is that interest rates will go up a bit at some point this year. But it is by no means certain for two reasons. One is because actually what's going on in the Middle east, there is a lot of uncertainty around Trump's Iran war about how bad these shortages of oil and gas are going to become, how bad the shortages of fertilizer, you know, jet fuel, diesel and all the rest of it are. Going to become. So there are uncertainties around that. And there's also this. When you forecast what a central bank has got to do, it's also about forecasting the views of people. And one of the things that was really quite striking about the. Because one of the innovations that the Monetary Policy Committee has introduced in the last year or two is each member of the MPC writes down their private views about what they think is going to happen to inflation and what should be done about it. And so you've got Hugh Pill at the one end actually voting. He thinks the inflationary risk is significant and he's not an inconsiderably. He's the chief economist at the bank of England. Right. So it's not the official view of the bank of England, but it is the official view of the economics department of the bank of England that interest rates should go up. Then there's a member of the MPC called Meghan Green who also appears to be of a view that maybe interest rates should rise, although she didn't vote for a rise. And then at the other end you've got somebody like Swati Dhingra, who's been on our show basically saying it's impossible at this moment to judge which of the three scenarios is the correct one. The bank of England is split. And given that it's a democratic vote whether interest rates go up, it is quite hard to be absolutely confident what will happen to interest rates. Although I'm afraid my view is, is given that the oil shock is greater certainly than the bank of England feared it would be only a few weeks ago. I fear myself that and that interest rates are going to go up a bit. Although I am very, very concerned about the disinflationary and deflationary depressing impact of this shock. I think growth will this year will be negligible, almost non existent and that in and of itself will mean prices. There will be downward press, pressure on prices.
- [13:34]
Steph McGovern
Yeah. And it's just worth reminding people, I think as well, what the bank of England, as you say, trying to figure out is what happens. But they're working with completely unknown parameters because as we've seen, the volatility with oil is still happening. There was meant to be this ceasefire. This has come under strain because just this week the US and Iran have exchanged fire. And this Strait of Hormuz that we keep talking about how important it is. The US had promised to help ships get through as, as part of this Project Freedom, but Iran saying anyone who tries to get through will be attacked and they keep, you know, this sense of okay with the ceasefire. Could things possibly go back to normal? No, because no one, you know, it's just impossible to predict what's going to happen next. And, and just I was with last week some of the, the guys who run from the Middle east, who run various businesses. They're pretty big ones. So that including the lads who run Magidal Futam, which is, you know, one of the biggest entertainment, leisure, hotel business, they own a ton of shopping malls, huge leisure outlets across the Middle East. And, and they were essentially in, at this big retail congress in Berlin trying to convince every, everyone that everything was going back to normal. They're like, things are okay, come back to the United Arab Emirates, come back to the Middle east, keep investing in us. We've been through volatile things before. And then at the same time you've got like friends who I've got in, who live out in the UAE saying they cannot. They were about to send their kids back to school, but the schools are not open again because there's been more missile alerts and everything's kicked off. So it just feels like it is so volatile it would be impossible for anyone to predict it. Never mind the bank of England trying to work out what it means in two years time. There's just no sense of any settling down yet. And that's what makes this really difficult is it impacts us so much, but it's impossible to work out when how this will all end.
- [15:32]
Robert Peston
Yeah, for British people, but also for the British government, this is extremely bad news. The government may and does say, of course, that this shock to living standards is not its fault. And that is true, it is not its fault. But the British people expect any incumbent government to sort these problems out. We don't yet know. And the government has got all these emergency preparations for the worst that could possibly happen in terms of impact on, you know, what it costs to heat our homes and food shortages and all the rest of it. But they haven't yet laid out detailed plans. This is a pretty unsettling backdrop for the local elections and those elections in Scotland and Wales. And although this is probably not in and of itself at the moment, another net negative for Starmer and the government, and that's probably only because the poll ratings of Starmer and the government are so low. So the other, another big sort of potential macro shock that is looming is what will happen in debt markets if labor is absolutely humiliated in these local and Scottish and Welsh elections. Because, and this seems to me to be reasonable, there are only the two possible scenarios for what will happen to the government after if it is humiliated. One is Starmer. A way will be found to get Starmer out. Were that to happen, almost certainly the new leader would shift labor to the left. And as far as lenders to the UK Buyers of UK Government bonds, buyers of, of government debt are concerned, a shift to the left in that way means the government will borrow more, and that is something that lenders to the UK don't want, and will punish the British government by essentially selling that debt, meaning that interest rates for the government go up and interest rates for the rest of us go up. Or Starmer will survive by promising a dramatic reset. But that reset will also also be a shift to the left, because that is where the pressure is coming from. Because if they lose significant numbers of seats to the Greens, the logic to fight back will be to move the government to the left. And in both of those circumstances, you could envisage genuine turmoil in bond markets. Now, I have to say, most people listening to this will, I think, feel that's not how democracy should operate. You shouldn't have a situation where the policies of the government of the day are determined by a limited number of wealthy individuals who run big investment funds, hedge funds, and the rest who determine whether or not to lend to the UK it's very, very uncomfortable for people's. Well, it's very uncomfortable for the government, obviously, very uncomfortable for Starmer, his colleagues, but it's also very uncomfortable for anybody who, who has a view about what should really, you know, influence the direction in which governments should go. You know, this is obviously a story, you know, as old as capitalism, but it is nonetheless always painful when it comes into sharp focus like this.
- [19:15]
Steph McGovern
Yeah. And, and I, I say this next bit without any political views in terms of, you know, any bias in any way. But, for example, you know, the Greens obviously are expected to do well in these. And the view is because the Green Party want to increase taxes and public spending, then, of course, as you say, the, the bond markets will be like, well, hang on a minute. This will, you know, this could. How are they going to pay for all this? How are they going to do all this? But there is an argument that the bond markets might be out of date with this because the Greens. And again, I just reiterate, I'm not saying I'm pro the Green Party, I'm not saying I'm against them, but what if it works and it gets growth? What if in the longer term, their plans for, you know, and, and the Change from the mainstream of what we've had which clearly hasn't worked. Like everything labor came in with hasn't worked. You know, we're as, we're in a worse situation than we were. What if reform or Greens coming in actually in the longer term, even though it looks like it doesn't economically stack up any of this and it could be, you know, a nightmare for the economy, what if it isn't? And that's the, that's the you, you get stuck in the same cycle based on what the bond market should happen. And as you say, it doesn't allow for democracy. Liz Truss decide her fate decided by the bond markets. So, and I'm again, I'm not saying she should have stayed. But there is an argument for you can never change from the regime of we've always had if it's always the bond markets that dictate what happens next for us. And I know that's a big oh, Steph didn't know what she's talking about, that's not how economics works, blah, blah, blah. But I just think what's to say that they, this, these, these outlander parties coming in might actually change things for the better? We don't know. And that's the problem. We're never going to find out because there'll always be this thing that the bond markets decide.
- [21:14]
Robert Peston
Look, you can't escape the economic reality that partly because of COVID partly because actually during the austerity years debt actually rose. Partly because the impact on government debt of the global financial crisis back in 20078 was significant. The UK's debt position is more fragile than many of our international competitors. And it is just a fact of life that whenever there are jitters globally about growth, it's always the uk, or rather the UK government whose interest rate rises disproportionately more than the interest rate of other countries. And one of the things that has been striking and rather worrying is that on what's known as the benchmark guilt, the 10 year government bond, the interest rate government pays has gone above 5%. And that is a level we haven't seen for decades. That is, and it's painful and it's significantly more than other governments are paying. And it isn't that long ago ago pre trust actually the UK was paying less than competitor economies, competitive governments was paying less, for example before trust, than the US government was paying to borrow. So this is a big reversal since Truss and there's no, you know, it is spilled milk. There's no point complaining about it. It has got to be fixed. I mean, the thing, however, that you said is, is absolutely at the core of the British problem is if investors could be persuaded that the government had a credible plan to get the growth rate up, and there were a ton of things that it could have done when it was elected to get the growth rate up, then we would not be in this painful position, or not nearly to the extent that we are. If we had regained the confidence of lenders to the UK that the growth rate was going to rise or was rising and thereby was generating additional tax revenues to pay for public services, was boosting living standards, you know, the government would not be in this mess. And, you know. You know, in the end, it's quite hard to feel sorry for this government being in this position because they knew that growth was the challenge and they didn't. I mean, you say that the government failed, but it failed because it didn't have a credible, coherent growth plan and just hammered. It wasn't by accident that it failed. It's because, you know, it faced in two directions. It taught the language of growth and then did a ton of stuff that undermined growth. And that was a huge strategic error.
- [24:15]
Steph McGovern
And I'm really see that play out locally in terms of businesses closing down because of the business rates and the employee employment costs and everything else. It really, you know, and that's. It's not just. I heard this brilliant German minister speak last week and he was talking about. And I literally sat there going, come to the uk, you've totally got the vision. And he talked about how when you look at business, you cannot just look at them in the context of jobs and the money they bring in. You have to look at what they do in terms of community cohesion, what they do for when, you know, these jobs are not just jobs for money, they're jobs for people's mental health. And he had, I mean, he had a background in retail, so he had genuine experience in business. And literally the room erupted with his. And it was a room full of people from all over the world. It wasn't just Germans, it wasn't just British people going, I wish he was one of ours. It was. It was a room full of people going, yes, he gets it. Because he talked about how actually, you know, growth and is it. It doesn't just come from the, you know, thinking about business in a monetary sense. It's about thinking about everything else they bring to the party in terms of, and. And mental health and public health and even communities providing, you know, they contribute to the infrastructure of areas. And, and I, and I really listened to him and thought, this is what we're not doing. We're not thinking about the, the, the bigger context of what making money brings. It isn't just capitalism. It is about all the, the social stuff it brings and the pressure that reduces on welfare and everything else. And we don't think of it like that. I think in this country we think too much. Like it's Vol. Vulgar to make lots of money. Like, yes, okay, there's too many very, very powerful rich people who get, maybe have too much control and get too much money. But for people, for, for entrepreneurs and things, there's a sense of, yeah, we want you to do well, but when you get to the, when you actually start making money and, and doing well and providing for your local economy, you just get hammered by the government who, on taxes and, you know, where's the incentive that then. Anyway, that's a bit of a mini rant, but it was really inspiring to hear a politician talk about like the economy in a way that was not about taxes and it was instead about all the good things that can come and someone who actually genuinely knew what they were talking about because they had business experience.
- [26:40]
Robert Peston
That is important. And, and in a minute I want to also talk about something else that's positive because quite striking to me, the number of economists and commentators who are positing that maybe AI can actually be a job creator, certainly in the sort of shorter term. So we're going to talk about that after the break. But just one final thought on this debt trap problem for politicians. It's quite striking that those on the left and the mayor of Greater Manchester, who I think if you can get a seat, and it looks to me as though they're a move, moves afoot to get him a seat in Parliament. Andy Burnham, I think, is the most, if he gets a seat in Parliament, he's definitely the most likely to succeed Keir Starmer as leader and Prime Minister. And I think that's not an unlikely prospect at the moment, but we'll see. But he has been flirting with the idea, given that we have to increase defense spending to first 3% of GDP, then 3 1/2% of GDP, and we're looking at tens of billions of pounds of more spending. If you're on the left of the party, you don't want that additional spending to come from, you know, at the cost of less spending for schools, hospitals and public services. So on the left, people like Andy Burnham are looking for ways to pay for defense that doesn't lead to cuts elsewhere. And so, you know, he's mooting. Well, maybe you could take that defense spending out of the fiscal targets, out of the fiscal rules, you know, have the defense spending not add to the official targeted national debt. I have to say that I think if any prime minister of the UK does do that, they will be hammered by investors because debt is debt. The idea that somehow a hedge fund based in America or some kind of money manager in Singapore are going to essentially take a patriotic view that it is their duty to lend to the UK at lower interest rates, rates to fund defense spending in the UK is pretty absurd. Anything that adds to the national debt will be seen by investors as bad for the credit worthiness of the British government and the British government will be penalized for that. So I'm afraid to say there is no easy fix by reworking the fiscal rules. If we are going to meet that, if we're going to increase defense spending in the way that, you know, essentially does, I'm afraid look very important, then the government is going to have to find savings elsewhere and there is no alternative. And you know, obviously where, you know, all the right wing parties, right of center parties reform and the Tories say it has to come from is from welfare reform. And I'm afraid to say, you know, you know, and you know, we've even had the former defense secretary, former head of NATO, George Robertson, member of the Labour Party, say it has to come from welfare restructuring. It is quite difficult to see where you would find the money if not from a reform of the welfare system. But my goodness, reforming the welfare system is not easy. And at the end of the day, obviously, as we've talked about before, the rational place to start is actually on support for those who are retired. But there is no government at the moment. Or I'll put that another way. There doesn't appear to be any political party brave enough to look at changing the called triple lock when it comes to the state pension. But there will have to be inevitably, I'm afraid, very painful decisions taken if we're going to hit those defence spending targets.
- [30:32]
Steph McGovern
And then on top of that, when you're thinking about people going to vote in the elections, they're hearing things about how much of a stress welfare is, is at the same time as reports coming out from, you know, the Tory analysis was put out saying that there are more than 600,000 households getting more in benefits than the average worker's salary. So it's showing that they were. These households were given more than £32,000 in welfare payouts last year. And the average annual salary of a British worker after tax, you know, is around that. And so you've got that coupled with, with the welfare budget's too big. And then the, you know, the, the working poor hearing that there's people on benefits getting more money than them from not working. And obviously that's a very divisive thing to put out because lots of people on benefits have not made that choice, that they're there because of whatever circumstances are going on in their life. But that really then focuses the mind when they're going to the polls to decide, well, do we need change? Do we need to bring in these people who are going to. Gonna cut that welfare fund and, you know, make it more fair for people. And so that's the, that that really plays on people's minds. I think at this time. That's what people are, you know, when people are talking to me about voting reform or whatever, they're saying it on the basis of, well, what about all the people on benefits while we're grafting and they're not doing anything? Which is obviously, you know, not the story for a lot of people. But, but it, but it does put pressure on when it comes to this and shows that we do need to get on top of the welfare fund.
- [32:06]
Robert Peston
Apart from just the fact that, that the bill for those who retired has gone up and up and up. The other side of it is that the number of people who are disabled and the rise particularly of mental ill health, that has also contributed to a massive explosion in the disability benefits budget. And that is the biggest challenge when it comes to reform. Incredibly hard to do both from the point of view of, you know, obviously in the Labour Party. It absolutely split the Labour Party, which is why, you know, Rachel Reese had to abandon her plans to reform the welfare budget. You know, now over a year ago or around a year ago, very difficult, you know, very difficult politically to do, but nonetheless, many would say absolutely essential. So, look, let's take a very quick break. I want. Because, you know, we had Tom Blomfield, you know, who was one of the founders of Monzo, come on the program and say income tax is going to disappear because nobody's going to be in jobs as a result of AI. There are other people, as I say right now, making a sort of counter argument about how AI certainly in the short term is going to be creating jobs. So let's look at that after the break.
- [33:26]
Steph McGovern
This episode is sponsored by Starling the bank that helps you organize your money, build grit habits and stay in control of your spending. Now I talk a lot about financial literacy and its importance in our economy. You know giving people knowledge but also confidence with money too. And Starling reckons anyone can be good with money and you can start simply by checking your balance daily. It gets easier every day and it takes the mystery out of it and then the real value comes from digging into the details with tools like Starling Spending Intelligence. So this is an AI powered search bar within Starling Current accounts where you can ask a question about your spending habits and get an instant answer in app. It helps deepen your knowledge and make more informed money decisions. It's a little like having a financial co pilot in your pocket mapping out exactly where your money goes. Search Starling bank to find out out More Good with Money starts here Ready to soundtrack your summer with Red Bull
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Robert Peston
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Steph McGovern
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Robert Peston
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Steph McGovern
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Robert Peston
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- [35:20]
Steph McGovern
This is a job for Indeed Sponsored jobs. Welcome back to the Rest Is Money
- [35:28]
Robert Peston
with me, Steph McGovern and with me Robert Peston. Now I was just really struck over the last couple of weeks every time I looked at, you know, views of an economist on substack or you know, in some of the financial press. There was one very interesting piece, for example in the ft. I kept seeing people refer to this very powerful theory of a really important 19th century British economist.
- [35:59]
Steph McGovern
Just love it when we're, you know, you would go a 19th century British economist. Go on what did the same. Why is it relevant to my life now?
- [36:06]
Robert Peston
An amazing man actually. He's called William Stanley Jevons and his life story is extraordinary. Comes from reasonably humble background, goes off to Australia, comes back, teaches at University College London Dies, he drowns off the coast of Hastings at the age of 47. And in a relatively short life, he builds up this enormous body of really important economic work in economics and he even designs a sort of prototype computer, right? So he's one of those absolute sort of polymath amazing Victorian figures, but he came up with this sort of theory is not quite the way of putting it, but principle of economics called, and it's called Jevons's Paradox. And he was looking at why as steam engines became more efficient, I. E. They produced more power with less cost coal, why it was that consumption of coal was going up, right? Because you'd assume if steam engines were using less coal to produce the same power, demand for coal would fall. But of course, what was actually happening was that the output of steam engines was becoming cheaper. So people wanted more steam engines. And the rise in demand for steam engines meant that, that even though these steam engines were way more efficient than the ones that had come before, the amount of coal that was needed went up and up and up, right? Because consumers and businesses wanted all this cheap output, whether it was in factories or to drive trains or whatever it is. Everybody wanted cheaper train travel, more stuff being produced by steam driven factories. So demand for coal increased. That's the paradox. A machine becomes more efficient, but rather than it meaning that it consumes less of the energy or commodity that it requires, it actually ends up, you know, the development means there's more consumption, right? And it's been a really, really, really important, it's been a really important theory in economics. So, for example, when there have been these rows about how you tackle climate change, there are the techno optimists, people like Bill Gates, for example, argued that actually restricting our lifestyle, it doesn't need to be that dramatic. Don't have to restrict how much we fly because technological change will mean that everything becomes more efficient and you know, uses less carbon and all the rest of it. And as a result of, of, of that, the world will naturally emit less. And so the example people always use is when the LED light bulb became, you know, proliferated, people thought, oh well, that will mean we'll, you know, use, you know, LEDs will use way less power because they do use way less power than traditional light bu. We'd all be way better off in terms of climate, you know, CO2 emissions and all the rest of it. But of course, because LED was so much more efficient, people bought millions more of them. We lit up all the centers of our cities and so we just went Wild. And so actually getting rid of the traditional light bulb didn't lead to the reductions that people hoped for. So, you know, if. So that's why some people continue to argue you've got to have lifestyle changes now, artificial, artificial intelligence. Because I've lost count on a number of articles recently have said Jevons paradox means that actually there'll be more employment. Because the whole point about artificial intelligence is it reduces the cost of intelligence. And if you reduce the cost of intelligence, and the argument is you basically give you and me AI help, we become way more intelligent for less, less, you know, for less cost. And therefore they're going to want, you know, it's going to. The argument is you get millions more people like us and you get millions, much more employment because everybody wants more intelligence and you employ way more people. Right. And it does work as a, as a theory, you know, if AI is simply making all of us more efficient. But as we have discussed on this program many times, this is, we think, the first industrial revolution in history where what's happening is not that humans are becoming more efficient, they are being replaced. Right. So if AI was simply about augmenting what any of us can do, fine, Then, you know, it would be the same as the steam engine. But it isn't the same as the steam engine. Because the whole point about artificial general intelligence, and I say this as somebody who yesterday was working with anthropic co work to, you know, to basically automate some of the things I need in my daily life and was just staggered by how efficient, you know, cowork is. You know, some of what I'm doing is, is, is at the. Well, most of what coworker is doing is actually at the moment is making me more efficient. But you can just see the potential of something like cowork to replace lots of us. I hope it's not going to replace you and me, but you just can't take that for granted, can you?
- [41:11]
Steph McGovern
Yeah, that's really interesting because you're right on that paradox. It would suggest that then we'll just employ way more people and do way more stuff because we'll have more people who are really efficient and all the
- [41:24]
Robert Peston
outputs will be cheaper. It will spending more money on the things that we want, you know.
- [41:28]
Steph McGovern
Yeah. And I don't know, maybe there is an argument for that because just coming back to this event, I was at this retail conference. It was interesting to me because I thought, you know, a room full of C suite level people in retail from all over the world would Be talking about volatility and talking about supply chain disruption and talking about how do we weather this storm of what's going on in the Middle East. And, and actually that was just a tiny part of it. Everything was about a. And they were talking about how in retail now it's totally past the experimentation phase and it's now being used in this disciplined way. You know, agentic AI is everywhere in these retailers now, not just for chat bots, but for search and discovery and personalization and, you know, predicting customers, you know, I don't know, statistics to get products that are right for them. And there are, you know, pricing logic, customers, journeys, the, the supply chain, how they, you know, deliver all. And they were, you know, talking about how this is. There was this great guy who's the CEO of a company called 10 Dam, which is this big, huge European based in Spain retailer. He sounded like Antonio Banderas. So when he delivered it, it sounded like it was a Hollywood movie star singer. But he was like, this isn't a wave, this is a tsunami that's going to change everything we do. But you cannot lose the emotional connection of people, people and the bricks and mortar of retail. And that is going to go hand in hand with AI. It's just that it's going to enhance all that. It's not going to mean we, you know, that the. Suddenly it's, in fact, it's the opposite of we've talked about for years in terms of the high street. It's that the high street and those physical outlets are going to be more important than ever because people are going to be desperate for that human connection, but they'll just want everything delivered in a way that is easier for them. So the boss of Ikea was talking about how instead of people now, you know, coming to them and saying, what's the best bed? They now have people going on to whatever chat, GPT, whatever you use to say, how can I sleep better? And then they're looking at how do I connect to that? So then they're. The answer for that question is, you go to Ikea, that's how you sleep better. Or if it's, you know, Lululemon, we're talking about how for them, it's like people might. This is a weird way of phrasing it, but this is what the woman from Lululemon said. She said, you know, people will ask our people in our stores, where's the best place to sweat? And so that's the question now. I was like, you can't say that in Many stores in Middlesbrough. But how the question.
- [44:11]
Robert Peston
So that's how she framed the question. Yes.
- [44:13]
Steph McGovern
She said that on stage where people go in and ask where's the best place to sweat. I was like, sweat? Yeah, yeah. The point she was making was now Lululemon, huge, you know, brand for athletic wear and, and athleisure and all that. But their connection, their AI is used so much in the business, but on a delivery point it's them in areas where they know they'll. That, you know, the store will be in a place where they know everything about that area. So they'll know like where the best gyms are, what kind of classes there are people will like. So if people come in with that question, question of. Or, you know, people ask a chat but whatever they, they're not a chat but they ask chat GBT or whatever they're using a question like where can I exercise? Or whatever, they will link into it to try and be the ones that then give them the, the products. Or on a human delivery level, if someone goes into the shop and says it or while, you know, I'm thinking about starting yoga, let me tell you the five best places around here where you can do yoga. And here are the perfect pants for story. It's thinking in that more yes, AI is going to make everything on a. On a level easier to deliver, more efficient with more personalization and everything else. But it's got to be connected to humans knowing, knowing the area, knowing the people and that localization and emotional collection connection will be just as important. But I think the thing for me that I took away from all of this was if you look at like E commerce, it's. It's barely changed for years, has it? You go online, you essentially get a catalog and you choose from there. But what retailers who are going to do well are now is. Is have that connection so that they're not. It's not even about going to websites.
- [45:51]
Robert Peston
It's just all within a challenge for retailers will be. I mean look, you know, and everybody listening will do the same, I'm sure. You know, if I'm unsure about notes, you know, what brand or what product or what retailer to use, I will ask Claude or Gemini and you know, and I'll give them a locality. In one of the things I did yesterday, which was very impressive is again I asked, you know, I was thinking of going to a particular, you know, island for a holiday and I just said, you know, draw, you know, can you come up with, with an itinerary, places to stay this is my budget. Can you, can you look at Airbnb for me and find out, you know, what's available? And it produced, you know, a three page document that was really impressive. Right. And you know, you know, why would I go unfortunately to a sort of tour guide, you know, when this was produced for me in five minutes and I have to say, look pretty robust similarly. So. Yeah, so I think, so I think part of the problem for, you know, obviously if you are in retail, you've got no option, you've got to use AI. But I think the problem with many of the AI services is they are to use an expression, disintermediating the traditional retailer because, you know, you can just do it at home or on your phone without stepping foot in the shop.
- [47:33]
Steph McGovern
But that's what where the retailers are saying they have to, you know, they're the ones that are going to survive and do well are the ones who are going to be embedded in that. So doing deals with, so you know, some of these brands were talking about the deals that they've done with Chat GBT or have done with Gemini and that's, or like for example, Sephora, the beauty brand was talking about deals with Uber Eats. So now when you order a pizza, you can order a lip gloss as well. And so, you know, they were talking about how you can't exist on your own. I know, sorry, that, that's more common than you think.
- [48:04]
Robert Peston
That's a natural pairing. Oh, I fancy a pepperoni thing of me. Oh, let's have some, let's have some apple lip gloss with it.
- [48:10]
Steph McGovern
I mean, but just on the, on that Sephora point because it's obviously, you know, like this is where a place where when they open a shop somewhere, it, the hype is unreal. There'll be cues for miles of particularly young women wanting to go there. And, and, but what they were saying they're now doing is for example in their stores, they want to bring people in so they can give them that experience, experience of skin matching and using it Agent Ki, to like analyze a person's face so that they can then, you know, get the right products for their skin. And, and that's where the, the bricks and mortar is going to be really important because people are going to enjoy that experience of going in with their friends, with their girlfriends or whatever and doing, doing these things together. And, and then that, and then that leads into a loyalty because that will go to the app and the app will then tell them, well, this works with this skin tone. And so you can see how, how people will still want that, that, that. Cuz, you know, I remember as a kid I used to get a fiver, get the bus into town. I bloody loved it in Middlesbrough Town center back in the day with a fiver, it wasn't just about what you bought, it was just that whole experiential level and that's what they've got to, got to play to. And that is why slime is a key part of all of this.
- [49:22]
Robert Peston
Let's, let's promote your own brand. But yeah, no, no, I, I, I, look, I think, look, obviously as you say, the experience of shopping is something that is valuable to people. And so one's certainly not arguing that AI can't be used to enrich that experience. Of course, that's right. But I was quite struck, one of our producers, Chris, when I was talking about essentially whether what was going to drive, what the big economic impact of AI would be, and I certainly think in the short term Jevons paradox does hold, because I think so much of what's going on in AI at the moment is making individuals more skilled, more intelligent, as it were. But I'm afraid somebody who thinks the rate of development of AI is really breathtaking. And I do believe that a lot of what humans do will be replaced effectively by robots, whether they're virtual robots or actually real material, physical robots. But a lot of jobs will disappear. And as I've said many times on this podcast, it is worrying to me that the British government, in fact no government, is making preparation for that essentially world of AI, plenty that involves human incomes disappearing. And the analogy, therefore that I maybe this is an appropriate place to finish that Chris came up with is because I was talking to him about the LED case and he said he feared that humans unfortunately were the filament light bulbs and that we were all going to disappear because AI was the led. But there we are. I think that probably on that very gloomy note, that is. We'll switch off the light now, shall we?
- [51:25]
Steph McGovern
Oh God. That's it from us. And the rest is money. Turn out the light and your way out.
- [51:30]
Robert Peston
Yeah, goodbye. See you soon. You can't reason with the sun. Trust us, we've tried. This summer, it's time to put that angry ball of fire on mute. Columbia's Omnishade technology is entry engineered to protect you from the sun's harsh rays that can burn and damage your skin. The sun is relentless, but so is our gear. Level up your summer@columbia.com to spend more time outside and less time slathering on aloe lotion. You're welcome. Columbia Engineered for whatever Ryan Reynolds here from Mint Mobile. I don't know if you knew this, but anyone can get the same Premium Wireless for $15 a month plan that I've been enjoying. It's not just for celebrities. So do like I did and have one of your assistant's assistants switch you to Mint Mobile today. I'm told it's super easy to do@mintmobile.com
- [52:25]
Steph McGovern
Switch upfront payment of $45 for 3 month plan equivalent to $15 per month
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Robert Peston
Required intro rate first 3 months only,
- [52:32]
Steph McGovern
then full price plan options available, taxes and fees, extra fee terms@mintmobile.com.