More to inflation story than meets the eye: CEI analysis

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According to the Consumer Price Index, December saw inflation rise to 3.4 percent, up 0.3 percent from the month prior. Despite this, inflation numbers are still in a much better spot than this time last year, says CEI’s senior economist Ryan Young.

“As usual, there is more to the inflation picture than the headlines. December’s year-over-year inflation was 3.4 percent, up from 3.1 percent in November. That looks ominous, though keep in mind this is down from 6.5 percent in December 2022, and 9.2 percent at its mid-2022 peak.

“Monetary inflation, which is the main concern here, appears to be in a decent place, though it could still be lower. When the Fed makes its next interest rate decision on January 31, expect it to hold rates steady. At this point, there isn’t much more they can do. The Fed stopped adding to its balance sheet almost two years ago, and the federal funds rate is about where it needs to be.

“Housing prices are up 6.2 percent over the last year, accounting for about half of the CPI’s increase. Excluding shelter, CPI inflation would be 1.8 percent instead of 3.4 percent—basically the 2 percent target rate.

“The Fed’s interest rate increases have helped to tame inflation, but at the tradeoff of higher mortgage rates and other loans. Rising housing costs are in part a hangover effect from earlier inflation. Think of it as an unavoidable inflation tax.

“Blame for high mortgage payments belongs with politicians for their stimulus overkill and the Fed’s monetary policy mistakes that caused high inflation in the first place. Policymakers can take steps such as loosening zoning and permit restrictions and environmental review requirements so more housing can get built. But such measures would treat only housing prices. Responsibility for overall inflation remains with the Fed to keep the money supply in check and on politicians to avoid yet another spending binge.”