OPINION:
News that inflation eased in April inspired euphoria in securities markets.
The S&P 500 index busted through its previous record high, and the key 10-year Treasury rate dropped, reflecting optimism that the Federal Reserve would soon broadly push interest rates down.
Not to be the skunk at Fed Chairman Jerome Powell’s tea party, but the war against high prices is hardly over.
In April, the consumer price index was up from March at a 3.8% annualized rate. Though below the 4.6% registered the prior three months, the April monthly increase was higher than the average for the prior 12 months — 3.4%.
The monthly inflation rate has been bouncing around for the last year, and progress in May could just as easily be worse or better.
Stripping out food and energy, core prices were up 3.6% from March to April — the same as its 12-month average.
The history of inflation struggles indicates the Fed should not start reducing rates until both headline and core inflation hit their target of 2%. That is just as likely to require further tightening of monetary policy as standing pat.
About 45% of the core is housing, and for almost two years, we have been told that a declining pace of rent increases would bring down housing inflation. But most of the shelter component in the CPI is the imputed rent on owner-occupied homes — what homeowners would have to pay to rent similar accommodations in their neighborhoods.
Over the past 16 years, we have not been building homes at the pace we did before the global financial crisis of 2007-2009.
Recently, higher mortgage rates have been a problem, but the secular trend reflects the scarcity of good sites near major employment centers, NIMBY zoning regulations and labor shortages. Resale prices on single-family units are rising more than 7% a year. With that, the shelter portion of the CPI is unlikely to rescue us from inflation.
Similarly, inflation for services other than housing was 5.1% in April.
All along, monetary policy has not been as tight as the task requires.
Inflation reached 8.5% in March 2022. And the Fed ultimately raised the federal funds rate — the overnight rate that banks charge each other to borrow reserves — to 5.3%, or about 62% of peak inflation.
When then-Fed Chairman Paul Volcker slugged it out with inflation that peaked at 14.6% in 1980, he pushed the target interest rate all the way to 19.1%.
Complicating matters, President Biden’s policies have a decidedly inflationary bias.
He has said controlling inflation is the Fed’s job, but what and how he spends matters — a lot.
The Congressional Budget Office estimates the president’s pandemic relief, incentives for electric vehicles and battery development, reshoring critical industries, infrastructure, and additions to the social safety net boosted the federal deficit from 4.6% of gross domestic product in 2019 to 5.6% this year and 6.1% in 2025.
The International Monetary Fund estimates larger deficits add half a percentage point to inflation. Mr. Biden’s climate change agenda has similar consequences.
The cost of installing a new air conditioner is up thousands of dollars. Overall, complying with new energy conservation and emissions standards is raising new home prices an estimated $31,000.
The recent surge of immigration, enabled by Mr. Biden rolling back many of former President Donald Trump’s policies, allowed employment growth of about 250,000 a month in 2023. The sustainable pace under the prior immigration regime would been about 100,000.
And all those added workers are looking for apartments — no surprise. The vacancy rate in New York City is at a historically low 1.4%.
Moreover, the recently approved $95 billion aid package for Ukraine, Israel and Taiwan, and Mr. Biden’s program to forgive an added $475 billion in student debt, will add to the federal deficit.
Now a bipartisan group of senators is proposing the Pentagon spend an additional $32 billion annually on artificial intelligence to keep pace with Chinese and Russian military capabilities.
At the end of 2025, most of the personal tax provisions of the 2017 Tax Cuts and Jobs Act will expire. Few observers expect these will be permitted to lapse entirely, and extending those without raising other taxes could cost $4.8 trillion over 10 years.
It’s safe to assume that the stimulus to aggregate demand and inflation created by bigger deficits will grow.
Ordinary Americans see this in their lives — groceries are taking the largest share of family incomes in three decades, and low-wage workers struggle with food insecurity.
Consumer expectations for inflation over the next year, as tracked by the Conference Board, University of Michigan and New York Federal Reserve average about 4%.
In this environment, the Fed should not be talking about easing monetary policy. Rather, it should recognize that interest rates may still have to go higher.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
Please read our comment policy before commenting.