It’s not the case that the US inflation slowdown doesn’t stem from Fed rate hikes.
A lot of the industries which have experienced price reductions aren’t impacted by interest rates.
Recent US inflation data have been a triumph for team transitory economists who predicted that inflation would fall without any interest rate hikes.
The US consumer price index (CPI) increased by 0.1 percent between October and November, well below the 0.3 percent increase the economists asked with Dow Jones had predicted.
A variety of indicators of inflation dropped or slowed in November. This is partly because of the ease of supply chain problems and partly due to the fact that businesses had stockpiled goods due to the supply chain crisis and were now forced to sell some of the inventory at an expense. However, rate hikes? They seem to have had nothing to contribute to it.
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If interest rate increases had a positive effect on inflation, we’d be expecting to see prices fall for housing in the current market where mortgage rates have risen to 6.6%. However, the high cost of shelter have remained high throughout November. We are seeing the inflation rate slowing for new vehicles and a decline in used cars , despite the fact that the sales of cars have increased.
The inflation that’s been the most consistent? It’s the price of items related to housing, such as home furnishings and appliances that are continuing to climb. This is in spite of the fact that the tightening of the financial markets by the Fed has decreased the volatility of this home market.
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What is the impact of falling rent costs?
The CPI’s measurement of rents tends to fall behind current prices however, attempts to gauge the prices of today indicate that rents are declining.
It’s unlikely that the decline is due to the Fed’s rate increases since Americans aren’t the majority of people who finance rents according to the economist Alex Williams of labor policy group Employ America noted in an article on their blog. Rents typically fall due to lower incomes or job opportunities.
“We are witnessing that prices–even ones that are primarily influenced by the rate of growth in employment slow down as the job market is growing and wages increase,” Williams wrote.
“In fact, it suggests that we can achieve an average of 2% rent inflation, while the employment rate continues to rise. There is no need for the kind of job losses caused by recessions that prominent economists are trying to create.”
The long-term path of interest rate increases
The reason the Fed’s rate increases haven’t had a greater impact is because they typically take between six and nine months to make throughout the market.
When borrowing becomes more expensive for banks by Federal funds rates the banks won’t instantly change their ways and increase the cost of borrowing to everyone else. (There also exist other policy factors that cause the mortgage rate to exceed the Fed’s target).
Although the Fed has decided to rethink rates by 75 basis points to the benefit of rates that increase by 50 basis points, the new, slow rate shouldn’t be seen as a move toward a looser monetary policy Joseph Politano, a labor market analyst, said in the Apricitas Economics newsletter this week.
Fed Officials were more gloomy in their December economic forecasts than they were at their previous meetings, forecasting greater interest rates and a rise in unemployment for 2023.
The Fed is watching wages as it believes wages will determine the direction of inflation. The index for employment costs during the third quarter declined from 5.6 percent over the first quarter of the year to 5.2 percent.
Although certain economists raised concerns concerning an 0.6 percent increase in monthly wages per hour in the November employment report, the median week’s hours worked fell which means that the wage data in the employment report are biased upwards.
The growth in the employment market is expected to slow by itself in 2022 , and it has already been slowing, according to Skanda Amarnath, the executive director of Employ America. This will provide the Fed time to think before attempting to further increase unemployment in order to bring down costs, Amarnath added.