Fed Banking On Interest Rate Hikes To Keep Inflation In Check

The bankers and investors will get the latest evidence this week why the Fed will raise its target short-term interest rate in mid-March. The monthly Consumer Price Index surged 7.5% in January. Removing food and energy price hikes, inflation still was up 6% — three times higher than the Federal Reserve’s long-run goal.

Inflation did not cool much last month. A year ago, price hikes were contained. Twelve months later, the cork is off, and February’s data will mark a full year of inflation growing at more than the Fed’s 2% target.

Beyond the eye-catching headline number — what is inflating inflation?

The price changes of all products are not equal when computing inflation. The CPI is a weighted index. In the nomenclature of government statisticians, shelter prices are more influential than the price of anything else, and more influential than the prices of almost everything else combined. It’s important to note the CPI doesn’t capture home prices, but the cost of “renting” a place to live. The shelter portion of the CPI is running hot — 4%. That’s well below the overall number, but is important because it accounts for a third of the index.

Still, it doesn’t account for the super-hot inflation. Household goods are about 20% of the overall number. Stuff like curtains, furniture, tools, and clothes are considerably more expensive than a year ago. So are groceries and, of course, gasoline.

The Fed interest rate hikes that will begin later this month won’t have much effect on those last two items. That leaves a tighter space for the Fed to attempt to let the air out of inflation.

Tom Hudson hosts ‘The Sunshine Economy’ on WLRN-FM, where he is the vice president of news. Twitter: @HudsonsView

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