David Gitlitz has been predicting for some time now that the economy will stay robust and that inflation’s still a problem. The bond market may be forecasting recession and falling inflation, but that’s a bet that will be proven wrong, says the chief economist for TrendMacrolytics.
A few weeks back, Gitlitz’s view looked mistaken. In late September, the yield on the 10-year Treasury dropped to under 4.6%–the lowest since February. With Fed funds at 5.25%, a 4.6% 10-year yield created an inverted yield curve in no uncertain terms. Recession, in other words, was coming, the fixed-income set predicted, and inflation was winding down.
But in the wake of yesterday’s report on consumer prices for September, investors are again wondering if inflation is still a threat. Yes, top-line CPI fell 0.5% last month, and the yield curve’s still inverted. But the 10-year’s yield has been rising of late, and so is core inflation. In fact, core CPI advanced 2.9% for the year through September–the highest in nearly a decade.
With the latest inflation report hot off the government’s press, we thought it was a timely moment to chat with Gitlitz and get the details on his latest thinking. What follows is an edited transcript of our phone conversation from late-yesterday afternoon.
Q: What’s your take on the consumer price report for September? The top-line measure of CPI fell, but CPI ex-food and energy advanced by 2.9% for the year through last month, the fastest pace since 1996.
A: The suggestion that somehow…there’s nothing to worry about [regarding inflation] is off the mark.
Q: Why?
A: Because a 2.9% annual core inflation rate…can hardly be considered benign. The top end of the Fed’s comfort zone [for core inflation] is 2.0%.
Q: We’re way above the Fed’s comfort zone.
A: That’s right. I think it’s likely to get worse before it gets better.
Q: Why?
A: Because the price pressures that are embedded in the system, as a result of the Fed being as easy as it’s been for as long as it’s been, are feeding through. Within the next year there’s a very good chance that we’ll be running something like a 3.5% core. And that’s just based on what the Fed’s already done. There’s basically nothing they can do to reverse that. The only thing they can do is get to an equilibrium posture so that they don’t continue to make it worse. And from everything we monitor, they’re still not [at equilibrium]. So we think the Fed will be raising rates.