Economist warns that "demand-side" of inflation is now entrenched
As debate intensifies over the pace and timing of potential interest-rate cuts, one prominent economist is warning that easing policy doesn’t belong in the discussion at all, given what he describes as the surprising underlying strength of the U.S. economy.
“The debate over the Federal Reserve’s policy trajectory hinges on the underlying drivers of inflation,” wrote Torsten Slok, chief economist at Apollo Global Management.
Slok pointed to a recent study from the San Francisco Fed showing that current inflation pressures are primarily demand-driven — the result of strong consumer spending and resilient economic activity.
That dynamic, Slok argues, leaves little justification for rate cuts.
“As long as demand-pull inflation keeps the headline rate above the 2% target, a higher-for-longer interest rate stance is required to bring the economy back into balance,” he wrote.
Slok contrasted that backdrop with supply-shock-driven inflation, which he said would present a stronger case for aggressive rate cuts.
He isn’t alone in voicing concern about the direction of Fed policy.
Charlie Bilello, chief market strategist at Creative Planning, has repeatedly argued that the Fed’s current policy outlook “makes absolutely no sense,” contending that policymakers should be considering further rate hikes, not cuts, if they remain committed to their 2% inflation target.
Pandemic overhang is still fueling inflation
The current inflation battle has less to do with tariff pass-through effects and more to do with the lingering overhang of pandemic-era economic distortions, according to economist Joseph Brusuelas, who echoed recent warnings from Slok and other policy analysts.
Brusuelas said the Fed “still has work to do” to bring both inflation and inflation expectations back in line with long-term consensus targets.
The latest reading of the Core Personal Consumption Expenditures (PCE) Price Index — the Fed’s preferred inflation gauge — came in at 2.9% year over year in August, still above the central bank’s 2% target.
However, broader inflationary pressures remain a concern. Data from the New York Fed’s Center for Microeconomic Data show that consumers now expect inflation to run at 3.2% over the next 12 months and about 3% over the next five years. Those figures suggest inflation expectations remain stubbornly elevated, even as policymakers begin to ease financial conditions.
At the same time, the Fed appears to be shifting some of its focus from inflation to the labor market amid political pressure from the Trump administration and signs of cooling employment conditions, including rising layoffs, slower hiring, and a widening gap between job seekers and available openings.
Unfortunately for the inflation-first camp, the Fed is already well into its easing cycle, having cut rates twice since September and signaling another potential cut in December.