A Downtrend with U.S. Inflation
2 Min WatchArticle03 Feb 2023
A Downtrend with U.S. Inflation
By Blu PutnamAt a Glance
For inflation, it is shelter prices that matter, and shelter in the CPI is still rising
Over the last three months, core inflation has been running under 4% annualized, with headline inflation even lower
Inflation in the United States is receding. How much credit should we give the Federal Reserve? Possibly not as much as one might think.
Headline CPI inflation peaked in June 2022 at a 9% year-over-year pace and has declined for six straight months to 6.4%. The Fed’s favorite, the notoriously sticky core PCE inflation rate, peaked back in February 2022 at 5.4%, and with a bumpy ride, has now declined to 4.4%. And over just the last three months, core inflation has been running under 4% annualized, with headline inflation even lower.
In 2022, the Fed raised its federal funds rate from near zero to 4.33% and started shrinking its balance sheet. As a result, 30-year fixed mortgage rates rose from just under 3% at the end of 2020, peaking at above 7% in October 2022, before receding a little to 6.6% by year-end 2022. House prices and housing sales are now in decline. But houses are an asset and are not included as part of the price index. For inflation, it is shelter prices that matter, and shelter in the CPI is still rising.
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While Fed actions have helped, inflation is falling mainly because the key causes – the pandemic-induced extra demand for goods, the supply chain disruptions that followed, and the massive fiscal stimulus that allowed spending to keep pace even during elevated unemployment – are all in the rearview mirror. If one wants to give the Fed extra credit for resolving the inflation surge, then one should also give the Fed most of the blame for causing it, and that would be wrong too.
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