CPI Report: Fed Increasingly Finds Itself in a Tough Spot
CPI Report: Fed Increasingly Finds Itself in a Tough Spot
For several months earlier in the year, inflation was coming in better than expected. But that is no longer the case. Inflation has recently firmed and become uncomfortably sticky, even as the labor market has continued to cool and slacken.
That puts the Fed in a tight spot. The labor market continues to scream for a rate cut, but inflation no longer appears to be sustainably moving towards the Fed’s 2% target, which Chair Jerome Powell has long told us is the condition for continued cuts. While markets are still pricing in an 85% chance of a cut at the next meeting, that is probably optimistic. The chance of cuts at the next few meetings is growing slimmer with each CPI and PCE inflation report.
Core CPI Inflation came in at 0.31% in November, a touch higher than expected, keeping the 12-month rate at 3.3%. The 6-month annualized rate rose to 2.9% from 2.6%, and the 3-month annualized rate to 3.7% from 3.6%. The Fed’s preferred measure of inflation, core PCE inflation, is now likely to end the year at around 2.9%, above the Fed’s forecasts.
The key component contributing to inflation remains housing. High interest rates have cooled the housing market but had limited effect on prices because inventory levels are so low. They have been a blunt instrument, meaningfully slowing the labor market while housing prices have continued to rise rapidly.
A better approach would be to hand the job of solving housing price inflation from the Fed to another part of government. An approach focused on expanding supply could conceivably reduce shelter price inflation more meaningfully while increasing job growth and hiring and reducing unemployment.
In the recent presidential election, both candidates presented proposals for slowing the growth in housing costs and making housing more affordable. Several think tanks have also offered proposals, such as the Economic Innovation Group’s suggestion that the federal government should adopt standardized, best-practice zoning and building regulations, and give municipalities incentives (called “Density Dividends”) to adopt them and build more. It’s time to put pressure on the White House step up and lead the charge. It alone can rally the country around an abundance agenda that gives us more jobs, more housing, and more stable prices.
Take a tour of the latest data on inflation through ZipRecruiter charts.
