As I’ve noted many times before, the Fed cannot stop wealthy people from using their pandemic savings to buy overpriced goods and services. It also has no influence over supply chain problems or federal spending. As a result, inflation is coming down, but not as fast as the Fed would like. Is there any prospect of that changing in the near future?
To answer that, consider three areas in which the Fed, on its face, has considerable influence on pricing decisions: housing; credit card purchases; and auto prices. Here is what is actually happening:
- HOUSING: Efforts to increase supply are being restrained by increased credit costs. In addition, would-be sellers are being discouraged from putting homes on the market for fear of paying the higher interest rates on a new, bigger house. Many houses are still being purchased with cash. Finally, the demand for housing can be satisfied by either purchases or rentals, but on the whole, it is inelastic. As a result, home prices are not falling with the speed desired by the Fed.
- CREDIT CARDS: Rates on unpaid balances have always been outrageous. Do you think consumers really notice when they go even higher?
- AUTO PRICES: The car manufacturers have moved to a pricing model in which they make large profits selling fewer cars for higher prices. In other words, greedflation controls here, not interest rates.
The bottom line is that the Fed can’t really do anything significant to bring down inflation except by destroying consumer confidence by rattling the stock and bond markets. Is that really worth it to get, say, from four to two percent? I would say no.