The Fed seems to have done it, raising interest rates enough to break the back of the highest inflation rate in 40 years. But will it be enough to stop the Fed Governors from continuing to raise their interest rates and cause a recession?
Let us hope so, as financial markets are rallying on the news and interest rates are tumbling. The Fed looks at the rate of inflation that is a different animal from day-to-day prices seen by consumers and producers, which are tumbling faster
I hope the Fed has done enough, as the main ingredients of consumer prices—gas, food, and housing prices (or equivalent rents, in the case of housing)—have been declinng of late. And this is reflected in longer-term interest rates, but not in the Fed’s short-term rates that determine credit card and auto loans.
The U.S. consumer-price index (CPI) reflected in the above FRED graph fell 0.1 percent in December and posted the first decline since the onset of the pandemic in 2020, pointing to a further slowdown inflation after it hit a 40-year peak last summer.
The annual rate of inflation fell for the sixth month in a row to 6.5 percent from 7.1 percent. Its 40-year peak was 9.1 percent last summer. The so-called core rate of inflation, which omits food and energy, rose 0.3 percent. The core rate over the past 12 months dropped to 5.7 percent from 6 percent to mark the lowest level in a year.
This is what pandemics and wars do—create shortages of such essential items, hence the panicked Fed Governors who were fearing a repeat of the 1970s inflation surge when OPEC oil embargos and a war between Eqypt and Israel broke out.
The so-called Middle East war was quickly over, but because we were still dependent on fossil fuels and hadn’t yet developed domestic production with the infamous fracking boom, we needed OPEC supplies. So it took longer for inflation to subside; almost 10 years during the 1980s, in fact.
The developed countries are bringing down energy prices with alternative fuel supplies and a price cap on Russian oil.
Housing prices (and equivalent rents) will subside as interest rates continue falling. And economists are beginning to notice the decline in inflation.
One economist quoted by MarketWatch said, “The 3-month annualized core CPI is down to 3.1% and at least another 1% lower if using new leases versus existing leases that have a six to twelve month lag. We continue to expect the Fed to only raise rates two more times as CPI continues to moderate,” said Bryce Doty, senior portfolio manager at Sit Investment Associates, in emailed comments.
Food prices may be the most difficult component of the CPI to bring down with the current shortages of such essentials as wheat and corn.
But help might be on the way come Spring, since California supplies a large part of US food supplies. The prolonged drought has caused California state crop production to drop some 50 percent.
According to the California Department of Food and Agriculture, California’s Central Valley supplies eight percent of U.S. agricultural output and produces 1/4 of the Nation’s food, including 40 percent of the Nation’s fruits, nuts and other table foods.
But the Pineapple Express, named because an almost endless stream of atmospheric rivers originating near Hawaii have hit California this winter, may have broken the latest drought. So there is some hope for lower food prices as well.
One homeowner who was recently interviewed by a local Santa Barbara TV station said he wasn’t surprised by the latest floods affecting California because they occurred after almost every drought period.
Maybe most US consumers know this as well, and will be able to weather the latest inflation cycle without too much damage to their pocketbooks, if the Fed Governors understand such natural phenomena as well and don’t cause a recession. Inflation seems to occur in cycles due to events the Fed has little power to control, as do droughts and floods.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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