Fed Raises Rates to Fight Inflation

As the Feds raise rates to fight inflation, will it cause the price of Gas or Used Car Prices to decrease?  Both are supply-related issues. 

What is noticed is the 2021 April, May and June Used Car Price run-ups will start rolling off in May-July 2022.   When a single item has a one-month price run-up, that non-recurring will continue to impact the inflation total for the next 12 months.  The gift that keeps on giving. The same thing happens to NCRIEF annual return is the product (i.e. multiplication) of quarterly returns.  Since the math is a product, it does not matter which quarter the return occurred in.

As inflation decreases due to these non-recurring 2021 items dropping out of the 2022 CPI inflation calculation, the Fed’s higher interest rates will look to have worked to “tame inflation”.

Inflation: 12 Month Period Ending: February 2022

The 12-month Consumer Price Index (CPI) was 7.9% as of Feb 2022. Energy prices were up 26% and that is worldwide AND Used Car Prices were up 41%. Exclude energy, food, and Used Cars and inflation was 6.4%. The Federal Reserve sets interest rates based on personal consumption expenditures (PCE) which is 4.6%.

MAJOR CAUSES OF INFLATION – higher Energy and Used Car Prices

As a bar gets closer to the LEFT, it will fall off as new monthly data becomes available. The 3-month spike in Used Car prices in April-June 2021 will fall off starting in May 2022. Higher interest rates will NOT solve these isolated sources of inflation.

Global Gas Prices

GAS PRICES are an international item that affects all especially given Putin invasion of Ukraine on 2.24.22. As we move forward in 2022, and the impacts of COVID-19 subside, the economy will come into focus. Below are the publication dates of the CPI, PPI, and Net New Jobs. These items will be key factors during the Federal Reserve’s meetings which are also listed below.

Bill Knudson, Research Analyst Landco ARESC