Inflation holds steady, Fed interest rates likely to stay put

The Consumer Price Index went up 0.1 percent in the month of November. Its 12-month increase is 3.1 percent, same as last month’s report. The number was pushed up by rising housing prices, but was also pushed down by falling energy prices.

For inflation purposes, Core CPI is the more important number. It excludes volatile food and energy prices, which often move for reasons having nothing to do with inflation. Removing them from the picture helps to isolate the effects of monetary inflation, which is what most policymakers are interested in. Core CPI increased three times as fast as standard CPI during November, at 0.3 percent, compared to 0.1 percent for standard CPI. Core CPI’s 12-month increase is also higher than standard CPI, at 4.0 percent against 3.1 percent.

Since part of this faster core price increase is due to housing prices, it again isn’t necessarily due to monetary inflation. Core CPI is a better inflation detector than standard CPI, but it is not perfect. This month’s numbers show why. Housing prices are going up faster than inflation because of supply and demand, interest rates, and regulations. They did not go up due to increases in the money supply.

Policymakers can ease the faster-than-inflation part of housing price increases by liberalizing strict zoning and land-use regulations, tamping down on excessive environmental reviews and other costly paperwork, and by ending tariffs on construction supplies like steel and lumber.

Lower interest rates would also help lower housing costs, but those are unlikely to change until at least next year. The Federal Reserve’s Open Market Committee (FOMC) is meeting today and will announce its interest rate decision on Wednesday. It will likely hold the federal funds rate steady. Other rates, including mortgage rates, key themselves in relation to the federal funds rate. If the federal funds rate stays the same, mortgage rates will likely stay steady as well.

A growing economy and strong labor market give the Fed room for another interest rate increase if it wants to put an exclamation point on its inflation-fighting efforts, but FOMC members likely don’t view that as necessary at this point. Absent another crisis or another spending binge from Congress and President Biden, Fed officials likely think they have done enough for now.

The Fed has held money supply growth in check for a year and a half now, which is by far the biggest factor in inflation. Their interest rate increases and stated commitment to inflation control have hopefully managed the public’s inflation expectations, which the Fed hopes will do the rest of the work in getting inflation back to its 2 percent target. This is not a surefire plan, but we are in a much better place than we were a year ago.