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The latest US inflation data was a fleeting victory for the team. economists who predicted that inflation would fall without raising interest rates.

The US consumer price index (CPI) rose 0.1% in the October-November period, well below the 0.3% increase economists polled by Dow Jones had forecast.

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In November, several indicators of commodity inflation slowed down or even decreased. This is partly due to the easing of supply chain bottlenecks and partly because businesses had stockpiled goods in response to the supply chain shock and now needed to sell some of that stock at a loss. But interest rate increases. They seem to have little to do with it.

If rising interest rates were to slow inflation, we would expect to see house prices fall now that mortgage rates have risen above 6%. Still, high shelter costs persisted in November. Instead, we’re seeing inflation slowing for new cars and falling for used cars, even as car sales have picked up.

And inflation, which has been the most stable? That would be the prices of housing-related goods, such as home furnishings and appliances, which continue to rise. That’s when the Fed’s tightening of financial conditions tightened the housing market.

What about lower rental costs?

The CPI’s measurement of rents tends to lag current conditions, but attempts to measure today’s asking prices suggest that rents are falling. This decline is unlikely to be due to the Fed raising interest rates, as Americans typically do not finance their rents, as Alex Williams, an economist at the labor policy group Employ America, noted in a recent blog post. Rents often decrease in response to declining incomes or job opportunities.

“We see that prices, even prices that are largely sensitive to the pace of job growth, may slow as the labor market continues to strengthen and wages rise,” Williams wrote. “In fact, it suggests we can achieve consistent 2% rent inflation while employment continues to grow. There is no need for recessionary shocks to jobs, which some prominent economists are looking to engineer.”

The long road to rising interest rates

Part of the reason the Fed’s rate hikes don’t have a bigger impact is that they take about six to nine months to work their way through the economy. Once the federal funds rate makes it more expensive for banks to borrow, those banks don’t immediately turn around and make borrowing more expensive for everyone. (There are other monetary policy dynamics that cause mortgage rates to exceed the Fed’s targets.)

While the Fed has backed away from a 75-basis-point rate hike in favor of a 50-basis-point increase, the new, slower rate should not be interpreted as a sign of looser monetary policy, writes labor market analyst Joseph Politano. its Apricitas Economics newsletter this week. Fed officials were more dour in their December economic outlook than in previous meetings, predicting higher interest rates and higher unemployment in 2023.

The Fed is also keeping an eye on wages because it believes wages will dictate the path of inflation. The employment cost index fell to 5.2% year over year in the third quarter from 5.6% in the second quarter. And while some economists raised red flags about the 0.6% month-over-month increase in hourly earnings in the November jobs report, average weekly hours worked fell, meaning the jobs report’s wage data is skewed upward.

Labor market growth itself was expected to slow in 2022, and already is, said Skanda Amarnath, CEO of Employ America. That should give the Fed pause before it tries to raise unemployment to lower prices, Amarnath added.

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