Can The Fed Actually Stop Inflation?

Looking over the basket of products and commodities the government uses to produce the Consumer Price Indexes, it appears that the biggest hikes center around three key areas:

-Housing

-Energy

-New and (especially) Used Vehicles.

Naturally, increases in energy costs feed into other sectors, like food and the transportation needed to get product to market. Even so, food prices, while elevated, haven't gone up that much. Here's the price action on Ground Beef, Pork Chops and Chicken Breasts.

Choppy, yes, but still fairly range bound over the years, outside of that post COVID spike.

Even so, food prices can be quite volatile at any given time due to droughts, poor harvests, or shoot-from-the-hip tariff policies. Anyone who has pushed a shopping cart down a produce aisle knows this well, and that's why the government has an index that leaves food and energy out of the mix.

But the other sharply elevated prices are a cause for introspection. There's some evidence that the used car market is finally cooling off. And there are indicators that we may be on the other side of the slope on the inflation curve right now. "The cure for high prices is high prices" as the saying goes.

Certainly, the Fed's telegraphing its intentions helped do a little cooling and even so, demand can't stay elevated forever. That could bring the headline CPI numbers down a bit. But as I mentioned in a previous piece, the headline number can lead an observer astray.

There is very little Fed policy can do about an intractable housing shortage, or choked off energy supplies. Some have inferred that part of these shortages have to do with these industries being gun shy after the 2008 financial crisis (housing) and the shale oilfield bust, so production is not ramping up to satisfy surging demand and higher prices as they normally would. Some industry players see the surge as bankruptcy bait, and are content to watch the dollars roll without lifting a finger on CapEx. Who could blame them? Better to sell what you already produce at high prices than to add to supply to sell it at lower prices.

There are other factors responsible for the price action of these two components, however. For housing, local zoning ordinances have choked off needed inventory growth. Displacement and relocation on the heels of the Covid lockdowns have caused localized price surges in certain parts of the country.

For energy, the Ukraine invasion has rattled global supplies as nations seek to cut off Russia's funding for its war.

Fed policy can't fix those two, and housing and energy are perhaps the two most important components of the cost of living. I won't go into the political implications here, as even droughts are blamed on office holders. But this is a battle the Fed cannot win, unless the geopolitical issues are de-escalated first.

People have to learn that not every problem we face can be relieved by a policy solution. Some things just have to be endured until they run their course. And as we have seen so many times, they most certainly will. Unfortunately, for this country, even wearing a mask is equated with tyranny.