The latest round of inflation is functionally solved and barring any exogenous shock to the economy, it should be fully resolved in about two months. This is not a prophecy, but rather an observation that is widely misunderstood. The headline CPI data, which is the main reported figure, is only catching up with the reality. The true current inflation figure is much lower and declining, despite the Tuesday’s 4 percent year-over-year figure.
David Bahnsen and Lacy Hunt have been warning about this for months, but the Fed has not yet taken note. This misapprehension will inevitably lead to policy mistakes, as overly zealous inflation warriors seek to keep the rate hikes coming.
Although the cost of shelter is a lagging indicator, the truth is that the rate of inflation hit a wall one year ago, in June of 2022. The most current available number is the May 2023 number, which is just 0.07 percent above June 2022. This means that the most painful upward price shocks are now firmly behind us and have been for some time.
Outdated cost-of-housing data is disguising the true inflation rate. When we finally have the June 2023 numbers in a couple of months, the shelter costs will begin to reflect the flattening trend already observed in this area. This flattening will be more reflected into the headline CPI, and inflation will vanish as a political concern.
The responsible thing for policy-makers at this point is to begin the pivot away from monetary tightening and explicitly orient policy toward economic growth. Inflation is now yesterday’s concern. This means that a pause in rate hikes is prudent, and the rates already in place are more than sufficient to continue reducing the money supply.
Looking forward, do not be surprised as inflation comes down over the next few months. The time has come to worry about the next difficult chapter of this economic cycle: the pain of low or negative growth and its unhappy derivative effects. Mitigating that pain should now be priority number one.
The Fed often touts its “data-driven” approach. However, if the data are obsolete, the Fed will forever be reacting to last month’s economy. In this fast-moving situation, it is time for the Fed to look forward and end the rate-hiking cycle. Broadly speaking, price stability has been achieved, and that job is done.
