Over the last twelve months, Americans have become increasingly literate on some complex economic principles such as inflation, interest rates, the jobs report, the housing market, supply chains, and other macroeconomic topics that greatly impact the everyday lives of Americans. Once an afterthought, attention, interest, and knowledge of these complexities has been brought to the forefront, as television broadcasts and newspaper headlines remind us almost daily how many jobs were created last month, what inflation is this month, what gas prices are going to be, why the grocery bill is twice as high, and why the landlord is raising your rent.
To combat inflation, the Federal Reserve pulled out its sledgehammer, aka interest rate hikes, and struck the U.S. economy five times this year with little effect on the soaring cost of goods. Hiking interest rates is really the Fed’s only tool, and it doesn’t look like it’s going to stop doing so anytime soon. That’s because as overall inflation finally begins to plateau, core inflation continues its upward trend, and high interest rates come with some devastating consequences for American consumers. So what is core inflation and what does it mean?
Economic theory tells us that that higher interest rates lead to lower costs. The monthly Consumer Price Index (CPI), released by the U.S. Bureau of Labor Statistics, measures the change in prices paid by consumers for goods and services. Overall inflation peaked in May 2022 when it reached 9%, the highest year-over-year ever recorded. Since then inflation has come down slightly to about 7.7% in October, which is still astronomically high. However, core inflation, which excludes volatile food and energy, continues its steady rise going up .6% in August and September, and .3% in October. Core inflation is what the Fed cares about most, and while overall inflation is starting to taper, core inflation keeps rising. Five interest rate hikes are not having the intended effect.
In fact, the interest rate hikes are having far reaching consequences and could now be driving up inflation. One of the drivers of core inflation is home prices, categorized as “shelter” by the CPI, which saw a .8% increase in October, “the largest monthly increase in that index since August 1990.” The October numbers showed that the “index for shelter contributed over half of the monthly all items increase,” and was the “dominant factor” in the steady rise of core inflation. Along with shelter, the index for motor vehicle insurance was also a big contributor, rising 1.7% in October after rising 1.6% in September.
It appears that the Federal Reserve’s plans to increase interest rate in an effort to lower inflation is now contributing to the rise in inflation. Another unintended, but highly foreseeable, consequence of the Fed’s actions is that when mortgage rates hit 7% as they currently stand for a 30-year mortgage (a 16-year high), the cost of purchasing a home gets further out of reach, especially for first time homebuyers and minorities who had seen a slight boon during the pandemic when mortgage rates were less than 3%.
It’s clear that the Fed doesn’t have any other plans but to keep raising interest rates and President Biden has no plans whatsoever. The Biden administration has admitted they were wrong about inflation, and now we are trusting them to right the ship. Instead of forcing Washington to curb spending, get the debt under control, lower taxes, boost domestic manufacturing and productivity, and grow small businesses, Washington Democrats will continue to do the same thing and expect a different result.
Bob Carlstrom is President of AMAC Action