The Fed’s hesitancy in pausing rate hikes after its earlier mistake of waiting too long to begin raising rates does not equal a positive outcome for the US economy. In economics, two negatives make a bigger negative.
The Fed made a serious mistake viewing inflation as transitory and holding to that position for far too long. The data were showing us, even as we entered 2023, that inflation was moderating. Over the last 10 months, CPI has been running at an annualized rate of 3.3%, not the Fed’s 2.0% target, but close.
Shelter represents 33% of CPI and 40% of the Fed’s favorite inflation indicator, the Personal Consumption Expenditures deflator. The cost of shelter was the primary reason inflation began to rise in 2021. The Fed, surely aware that housing is a lagging indicator, should not have characterized inflation as transitory or made policy decisions that supported that view. Shelter-related costs are now trending down as both home prices and rents fall, but will take a while to work through the CPI. This trend was foreseeable in January. It is now June.
Another important inflation driver, commodity prices, has been trending down since June 2022. The Bloomberg Commodity Index is off 28.3% from its peak of nearly a year ago. This trend too was foreseeable in January. It is now June.