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August 2023

The Inflation Story Is Improving, but Victory Has Yet to Be Declared

Key Points

  • The Federal Reserve has been on a campaign to tighten monetary conditions to help reduce inflationary pressures.
  • The consumer price index has fallen to 3.0% from last June’s peak of 9.1%.
  • Fed actions have helped, but some of the improvements have been beyond the Fed’s influence, like declining energy, food and medical costs.

Since March of last year, the Federal Reserve has been on a campaign to tighten monetary conditions to help reduce inflationary pressures. They have raised the federal funds rate by 525 basis points to the median level of 5.375%,1 and they have reduced the amount of their bond holdings (quantitative tightening) by $880 billion (10.4%).1 All of this is an effort to reduce the pace of the strong level of consumer demand for goods and services, which the Fed views as the major cause of the elevated inflation.

It appears to be working. The consumer price index, the most well-known of the inflation measurements, has fallen to 3.0% from last June’s peak of 9.1%, nearing the Fed’s target of 2.0%. Some of that improvement has been beyond the Fed’s control. For example, the cost of transporting goods is cheaper now than it was before the recession (chart 1).

Chart 1: Global Supply Chain Pressure Index
value, not seasonally adjusted


Source: Federal Reserve Bank of New York, June 2023

This is due to logistical improvements and a sharp reduction in demand for many goods now that the pandemic is behind us. Also, energy, food and medical costs have fallen in the past year (chart 2), some significantly.

Chart 2: CPI: Selected Components
%, cumulative change since January 2020 to June 2023
Source: Bureau of Labor Statistics, June 2023


But the Fed is concerned about other areas of the economy regarding inflationary pressures. The most notable is housing costs, the largest component of CPI, making up 34.7% of the index. The pricing pressures shot up in 2021 and early 2022 when mortgage rates were low. But when mortgage rates increased in the latter half of 2022, it caused a significant decline in demand, and pricing pressures moderated (chart 2). Another concern is “super-core,” which is the cost of services without housing. Generally speaking, this category of inflation is the cost of services that are highly dependent upon labor costs (dry cleaning, auto repair, etc.). With the labor shortage, these costs have increased significantly in 2022.

In both the housing and super-core cases, the yearly inflation rate remains too high for the Fed; the annual changes are up 7.8% and 4.0%, respectively. These prices tend to be “sticky” and move slowly. It will force the Fed to keep interest rates higher for longer.



1 The Federal Reserve

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