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Update on Inflation

October 29, 2021

Inflation continues to be a concern for many — where do see inflation trends heading over the next year, and how will it impact your business? Catch our newest TrendsTalk episode with ITR CEO and Chief Economist Brian Beaulieu to learn more.



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

Hi, I'm Brian Beaulieu, CEO and Chief Economist of ITR Economics. And thank you for joining us for this edition of TrendsTalk. I want to give an update on the inflation scene and that ties into supply chain issues all at the same time. Now we continue to be in a very different, even a messy inflation environment. We followed the minutia and the gold cycle, which we said leads the CPI, which is what the Fed is concerned about by about 20 months. It is holding true. Gold is now in rate of change phase D, which means we're below year ago levels in pricing and the 3/12 rate of change, so the quarterly data compared to one year ago is rotating through a top right now for the CPI. So we're seeing a rate of inflation, consumer price inflation price. And it will be coming down.

That doesn't mean you're going to see immediate relief in some areas such as steel price. That pricing cause an effect mechanism, it is still going to demand higher steel prices for a while because the automobile industry is doing very low volumes of work because of the missing chips. It all tends to be connected at the hip though, right? And the automobile industry being a major source of steel scrap from stamping and therefore the steel scrap is in relatively scare supply, so steel prices are going to remain hot. I was just checking and the utilization rate for the US steel industry is running at about 85%, which is just about as high as it normally can get. I'm sure you read it along with all of us, that there's more capacity planned coming online, that won't rely on steel scrap. That's really forward thinking. That's great and it will help in the longer term, but it's not really going to help us in 2022 in terms of that particular commodity. But the overall CPI is going to rotate down.

But when you think about some factors like steel, isn't going to be rotating like it normally would, even aluminum is likely to be sticky on the upside. And you take that in conjunction with fiscal policy, fiscal spending going on in the United States, and you may or may not have seen that analysis that we've done, it's not hard to understand at all why the consumer price index rate of change and therefore rate of inflation is going to bottom out in a year, maybe a little over a year at about two, two and a quarter percent. So we're not going to get that reset back down to zero or near zero or below zero that we've seen in the last three cycles. And that creates a whole new ballgame for when we're on the other side of this soft landing that we see for GDP US industrial production in many other sectors. It means that that next cycle is going to be one with compound inflation.

And if you want a recent paradigm of what that's going to look like, feel like, go back and look at 2004, '05, '06 and '07, and ask yourself, did those rising interest rates hurt? And by the way, while that's a good paradigm for the interest rate rise we expect to begin, beginning in 2023, this trend is going to be ultimately much stronger and last much longer than the mid 2000s did. But still go back there and look and ask, okay, what did we do right? What could we have done better? If we had known this was going to be happening, would we as a company do anything different? And if the answer is, yeah, I would have done such and such if I had known, this is your chance. 2022, you think about these things, you start figuring out how you're going to implement what you need to do to get ready for the rising trends and inflation and interest rates in '23, '24 and '25. And we remain concerned that 2026, that recession that we've been talking about could be one of stagflation, which will be another TrendsTalk for another day.

Thank you very much for joining us. On behalf of all the amazing women and men of ITR Economics, we wish you a great day. Until 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.