Inflation: transitory or intransigent? Escalating prices are the US public’s biggest worry. Even Federal Reserve Chair Jerome Powell has abandoned his use of the term “transitory” for a rising Consumer Price Index (CPI), which in November reached 6.8% year over year.
Well, hold on a minute, says David Rosenberg, president and CEO of Rosenberg Research. Inflation might be peaking, he contends. And it should abate sometime next year, in his view.
Evidence for his sanguine take: In a research note, he pointed to commodity prices starting to fall from their peaks. Rosenberg follows 30 commodities, including gasoline, tin, and wheat, which are off their highs. Gasoline, for instance, fell to $3.44 per gallon in December’s first week, down from a US high of $3.50 in November’s second week (gas started the year at $2.33).
Only a handful of commodities are still climbing, he wrote: milk, coffee, burlap, and cattle. In November, whole milk was $3.67 per gallon, up from $3.47 in January.
To Rosenberg, who once was Merrill Lynch’s chief economist for North America, today’s inflation also stems from housing and “anything with a chip in it.” Housing will correct with new supply on the way, he predicted. What’s more, cure the supply bottlenecks and you cure the chip problem, as semiconductors began to proliferate, he declared.
“My outlook for the economy—for the lack of a better term in two words or less—is ‘muddle through,’” Rosenberg told Germany’s NZZOne website. “And that means inflation will come down next year.”
Housing costs have been swelling during the pandemic, adding to overall inflation, but Rosenberg argued that this will peter out by 2022’s second half. That’s when “the flood of multifamily units hits the real estate market,” he wrote. Reason: There is a construction boom underway for apartment buildings, to make up for a shortage that has dogged the housing industry since the 2008-09 financial crisis. “The multifamily housing segment is being driven by a demand for rentals as consumers move back to the city and remote workers prepare to return to their offices,” the National Association of Realtors observed in a research piece. Starts in the category jumped 20% most recently.
Inflation is top of mind for the public nowadays. In a University of Michigan consumer confidence survey, respondents ranked it as the biggest problem confronting the nation. That no doubt is why the Fed’s Powell shifted his description of inflation. On Wednesday, at the end of the Fed policymaking body’s two-day meeting, he is expected to announce accelerated tapering of the central bank’s bond-buying program, which is aimed at keeping long-term rates low—and he may even talk about lifting short-term rates higher sooner. Higher rates should be a brake on the inflation trend, the thinking goes. Not too long ago, the CPI was south of 2%.
The funny thing is that the fixed-income market isn’t as worried about inflation as the general public is. When the November CPI number was released Friday, the 10-year Treasury rate rose a mere 0.002 percentage point yield, to 1.487%. What’s more, the 10-year breakeven rate (what the futures market predicts for inflation) is 2.44%. That is nowhere near where the current CPI increase lies.
Rosenberg indicated that the severity and length of the current inflation increase surprised him. Still, the CPI surge won’t stick around, he added. “If you believed that transitory meant weeks, months, or even quarters, this is obviously not proving to be transitory,” he said. “But transitory truly defined just means an event that is expected to be short-term or brief in nature.”