US inflation slowdown not from Fed rate hikes

The recent US inflation data has been a victory for the transitory team: the economists who predicted that inflation would fall without interest rate increases.

The US consumer price index (CPI) rose 0.1% from October to November, well below the 0.3% rise that economists polled by Dow Jones had predicted.

read more

Several goods inflation measures slowed or decreased completely in November. This is partly due to diminishing supply chain issues and partly because companies had stocked up on goods in response to the supply chain shock and now needed to sell some of that inventory at a loss. But rate hikes? They seemed to have little to do with it.

If interest rate hikes were slowing down inflation, we would expect to see house prices fall now that mortgage rates they shot over 6% However, high housing costs persisted into November. Instead, we see inflation slowing for new cars and declining for used cars, even as car sales have rebounded.

And the inflation that has been more persistent? Those would be the prices of housing-related goods, such as furniture and appliances, which continue to rise. This is despite the fact that the Fed’s tightening of financial conditions has moistened the real-estate market.

What about falling rental costs?

The CPI rent measure tends to lag current conditions, but attempts to gauge today’s sales prices. suggest that rents are falling. This decline is unlikely to be due to the Fed’s rate hikes, as Americans often don’t finance their rent payments, explains economist Alex Williams of the employment policy group Employ America. noted in a recent blog post. Rents often fall in response to declining income or job opportunities.

“We are seeing that prices, even prices primarily sensitive to the rate of job growth, may slow as the labor market continues to strengthen and wages rise,” Williams wrote. “Indeed, it suggests we can get to constant 2% income inflation as employment continues to grow. There is no need for the kinds of recessionary employment shocks that some prominent economists seek to engineer.”

The long road of interest rate hikes

Part of the reason the Fed’s rate hikes haven’t had more of an effect is that they take six to nine months to work their way through the economy. Once loans become more expensive for banks through the federal funds rate, those banks don’t immediately turn around and make loans more expensive for everyone else. (There are other monetary policy dynamics that are causing mortgage rates to exceed the Fed’s goals).

While the Fed has backed away from 75 basis point hikes in favor of 50 basis point rate hikes, the new slower pace should not be construed as a shift toward looser monetary policy, labor market analyst Joseph Politano said. wrote in its Apricitas Economics newsletter this week. Fed officials were more dovish in their December economic projections than in previous meetings, predicting higher interest rates and higher unemployment in 2023.

The Fed is also watching wages because it believes that wages will dictate the path of inflation. The employment cost index in the third quarter fell from 5.6% year-on-year in the second quarter to 5.2%. And while some economists signaled red flags for a 0.6% monthly increase in hourly earnings in the November jobs report, average weekly work hours declined, meaning the wage data in the jobs report is upward biased.

Job market growth was expected to slow on its own in 2022 and already has, said Skanda Amarnath, executive director of Employ America. That should make the Fed pause before trying to raise unemployment further to lower prices, Amarnath added.

More than Quartz

enroll in Quartz Bulletin. For the latest news, Facebook, Twitter Y instagram.

Click here to read the full article.

Leave a Reply

Your email address will not be published. Required fields are marked *