David Kelly has a one-word image for today's inflation: Teflon.
"We essentially have got Teflon inflation in America - it won't stick," he said Wednesday, August 12, 2026, on Bloomberg Television. He was reacting to the consumer price index report, which tracks what households pay for goods and services.
The report showed muted underlying inflation, meaning prices looked calm once the most volatile items were set aside. It also left Treasuries, or U.S. government bonds, trading higher.
"Absolutely they should stay on hold, and I actually think they will," Kelly said.
When paychecks lag prices, everyday buyers can't keep fueling more price increases.
"You cannot get a price-wage spiral going if wages won't react," Kelly said. A price-wage spiral is a loop where higher living costs lead workers to demand more pay, and businesses pass those costs back to shoppers.
The Fed can cool the economy in two main ways. It can raise short-term interest rates, which makes borrowing more expensive, or shrink its bond holdings, a process called quantitative tightening.
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The argument for a rate hike is that it could stabilize long-term yields, the returns investors earn on long-term government bonds, by restoring the Fed's credibility. Kelly calls that argument "a close call."
He says quantitative tightening is the riskier option. It would hit long-term yields harder than a rate increase, and combining it with a hike could destabilize markets.
He also says financial markets are packed with leverage, meaning borrowed money. Even a modest rate increase could cause a repricing of assets, a broad move in prices as investors reassess what things are worth.
"If you do hike and you've got higher short-term rates, and the temptation is to move to a little bit more safety - and that could take some of the wind out of the market sails," he said.
Kelly thinks recent Fed communications have put the central bank "on the wrong track." He says the Fed is making a mistake by reducing how much it talks to markets.
"He is going to have to back off a little bit from his very aggressive rhetoric and say and admit and acknowledge there's some progress in inflation," Kelly said.
For investors, the big picture is slow improvement rather than a sudden turn. Kelly compares slowing inflation to an injury.
"It just heals slowly - and if you try and speed it up you're just going to mess everything up," he said. If the Fed listens, rates stay put, and markets keep reacting to each inflation report and each comment from Warsh.
The three forces pulling prices down will not show up in one clean headline. Tariffs should become less painful, oil should stay calmer if peace hopes hold, and wages are still not feeding the inflation fire.
For your portfolio, that suggests a stretch where patience could do more work than precise predictions.
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