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Interest Rates and Inflation

July 22, 2022

Coming off our recent Virtual Keynote Event, ITR CEO and Chief Economist Brian Beaulieu takes another deep dive into interest rates and inflation with the latest episode of TrendsTalk.


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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hello, I'm Brian Beaulieu, CEO and chief economist for ITR Economics. And thank you for joining me for this edition of TrendsTalk. I want to spend a few minutes talking about two things, inflation and interest rates. Both are very topical right now. Inflation, as you look at the CPI, hasn't crested as yet. We think the 3/12 rate of change, so three months worth of data compared to one year ago, will peak at about 9.1% this September. However, if you look at core CPI, which is closer to what the Federal Reserve really cares about, because they back out food and energy, that has already peaked. And if you look at their specific chosen inflation gauge, which is the Personal Consumption Expenditures Price Index, AKA the PCE Price Index, that's peaked back in March and it's down to 4.7%. It has an 80% of probability of continuing to decline.

We're looking at commodity prices, steel, copper, and aluminum coming down. The signs of lessening inflation are around us. And when there's lessening general inflation, there's going to be some instances of deflation, particularly when there's excess inventory to be found. That's going to be true in markets that really surge forward, unusually so during the COVID pandemic, because it was driven by stimulus money being given out hand over fist, we were stuck at home. So certain things got way out of whack industries, markets, unbalanced, and now there's too much inventory in the pipeline in those instances. And we're going to see those prices coming down. A lot of it has to do with the housing market, at a very prototypical case of an industry that clearly benefited from COVID, but it couldn't be sustained.

Which brings us to interest rates. The rate of inflation is coming down, even in the Federal Reserve's own measure. But as I record this, we're about, I think, five, six days away from the Federal Reserve deciding how much they're going to push interest rates up. A lot of people seem to think it's going to be about 75, 100 basis points. Tell you what folks, with the rate of inflation already abating and these commodity prices already coming down, the Fed really should just take a pause. Just, you don't have to push rates up just because you said you were going to. Our Federal Reserve, like most central bankers, has a track record of overshooting the mark, they raise interest rates too high. At this time, it wouldn't be hard for the Federal Reserve to do something really silly when it comes to interest rates.

We're only about 56 basis points away from an inverted yield curve, the way we measure it using the 10 year bond yield and the T-bill rate. Federal Reserve caused an inverse yield curve. Let's hope that they pause, see what's going on, look, listen. Instead of just driving this truck forward by looking in the rear view mirror. They could drive a truck right over a cliff by doing that. Danger with these interest rates isn't pertaining to 2022, probably not even 2023, we'll feel the adversity of these interest rate hikes more likely in 2024 or 2025, which is earlier than we previously anticipated.

Just wanted to let you know that, what we're going through now in terms of a slowdown, while we're witnessing these higher interest rates, that isn't the real deal. The real pain of these higher interest rates is one and a half, two years away. We'll have to contend with this for quite a while. What can we do in our businesses? Make sure you're lean and mean, but that you're still investing in yourself and in your processes. Labor shortage is going to continue to be with us, but labor inflation is going to abate also. You're going to have a hard time pushing through price increases like you did over the course of 2021 or even the first half of 2022. Strive for efficiencies, protect your margins. But it's going to get a little rough out on the seas. Thank you for listening to this edition of TrendsTalk, look forward to talking with you next time.


Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.