Numerous new indications indicate that the war on inflation is over, and not because of the Fed.
On Wednesday, talk of the Federal Reserve raising interest rates will be rampant, and people will be talking about everything they do and say. That probably increases short-term volatility, whether it’s up, down, or both. However, the truth is that their words are essentially meaningless.
A 75-basis-point increase is not something that the Committee is actively considering, Fed Chairman Jay Powell stated in May. In each of their following four meetings, they hiked that distance. He detested “forward guidance” in July, but Fed officials are still openly jawboning.
Disregard the Fed obsession. They are unsure of their next steps. How could you?
Consider input costs instead. Let me first clarify that “winning” does not entail a return to consumer prices from before 2022. Deflation, or sharply falling consumer prices, would be necessary to achieve that. We avoid doing that. Ever. Inflation slowing to previously acceptable levels is considered “winning.”
There are many signs of that, which have not yet been seen in stores. In order to see them, one must fixate on the input costs that competitive commerce converts into final consumer prices.
Consider the cost of crude oil, which is undoubtedly a key factor. After Russia invaded Ukraine, it increased. But after the peak in March, supply channels changed, production increased, and oil prices slowly fell; they are now down 42% from their March peak to levels seen in December 2021. Energy contributed to the rise in consumer prices but will now push us in the direction of stability.
Supply chain hiccups from the COVID era are everywhere decreasing. Shanghai freight rates decreased 77% from their peak in January. The American Logistics Managers’ Index showed that while capacity remained abundant, transportation prices were declining.
Earlier this year, as chip shortages halted the production of new cars, used car prices rose sharply. However, Manheim’s wholesale used car price index is currently down 15.6% from its record high to levels from August 2021. Dealer prices don’t yet indicate progress. They will.
Food? Because of fears of a shortage, the invasion of Ukraine drove up prices globally. Wheat prices are now half of their March highs. The spike in 2022 was eliminated by a 0.3% year-over-year increase in November’s UN World Food Price Index.
The biggest part of the CPI is housing. As you are aware, home price growth is slowing. You might not be aware that rent lags home prices by about 15 months. According to Zillow’s data, rent growth is rapidly slowing. Soon, more.
Some claim that the rise in government spending caused inflation. Maybe. Uncle Sam spent $5.76 trillion from October through the end of the year. Huge, but 24% below the $7.62 trillion peak reached in February 2021.
Many contend that inflation is caused by an excessive increase in the money supply. I can sympathize. But take note: In June 2020, US M4, the broadest indicator of that, which includes cash, deposit accounts, money funds, and securities that resemble cash, increased by 30.8% year over year. It is now 0.1%.
Others worry that inflation is being fueled by tight labor markets. Wrong. Nobel laureate Milton Friedman established long ago that wages always follow prices rather than the other way around. However, payroll growth has significantly slowed.
These advancements are primarily the result of supply catching up following COVID-era disruptions. They do not indicate that the Fed is doing well.
Later, when lending is impacted by monetary policy’s nudge to banks’ overnight borrowing costs, the economy is affected. To finance loans with longer terms, banks borrow short-term capital. Theoretically, Fed rate increases increase the cost of banks’ overnight funding, lowering profitability and volume and slowing the economy.
not now. Despite the Fed’s rate increases, lending increased from 5.8% in May to 12.0% in the current month. Why? Banks are not required to obtain overnight reserves. They are drowning in almost cost-free deposits that are unaffected by rate increases. Since lending is more profitable at higher long-term rates, more lending occurs.
Despite the panic, the Fed’s current actions primarily harm homebuyers and borrowers of mortgages. However, it has been demonstrated that inflation’s input costs were rising months before the Fed started printing money in June.
We have a bulging middle, like a snake that just ate a massive inflation rodent. But unless we eat more, it quickly passes.
not right this moment. Despite the Fed’s rate increases, lending increased from 5.8% year over year in May to 12.0% now. Why? No overnight reserves must be borrowed by banks. They are completely covered in almost cost-free deposits that remain stable during rate increases. More occurs as a result of higher long-term rates making lending more profitable.
Despite the hysteria, the Fed’s current actions primarily only harm mortgage borrowers and home buyers. However, as evidenced, inflation’s input costs were improving months before the Fed began its wild goose chase in June.
We are like a snake with a bulging middle that just ate a massive inflation rodent. But if we don’t eat more, it goes away very quickly.
What do you think of Fed possible blame in the inflationary tide? Please let us know in the comments.