Finance / Government Watch

What is Core Inflation and What Does it Mean?

Inflation
President Joe Biden delivers remarks on the economy, Tuesday, May 10, 2022

Over the last twelve months, Americans have become increasingly literate on some complex economic principles such as inflation, interest rates, the jobs report, the housing market, supply chains, and other macroeconomic topics that greatly impact the everyday lives of Americans. Once an afterthought, attention, interest, and knowledge of these complexities has been brought to the forefront, as television broadcasts and newspaper headlines remind us almost daily how many jobs were created last month, what inflation is this month, what gas prices are going to be, why the grocery bill is twice as high, and why the landlord is raising your rent. 

To combat inflation, the Federal Reserve pulled out its sledgehammer, aka interest rate hikes, and struck the U.S. economy five times this year with little effect on the soaring cost of goods. Hiking interest rates is really the Fed’s only tool, and it doesn’t look like it’s going to stop doing so anytime soon. That’s because as overall inflation finally begins to plateau, core inflation continues its upward trend, and high interest rates come with some devastating consequences for American consumers. So what is core inflation and what does it mean?

Economic theory tells us that that higher interest rates lead to lower costs. The monthly Consumer Price Index (CPI), released by the U.S. Bureau of Labor Statistics, measures the change in prices paid by consumers for goods and services. Overall inflation peaked in May 2022 when it reached 9%, the highest year-over-year ever recorded. Since then inflation has come down slightly to about 7.7% in October, which is still astronomically high. However, core inflation, which excludes volatile food and energy, continues its steady rise going up .6% in August and September, and .3% in October. Core inflation is what the Fed cares about most, and while overall inflation is starting to taper, core inflation keeps rising. Five interest rate hikes are not having the intended effect.

In fact, the interest rate hikes are having far reaching consequences and could now be driving up inflation. One of the drivers of core inflation is home prices, categorized as “shelter” by the CPI, which saw a .8% increase in October, “the largest monthly increase in that index since August 1990.” The October numbers showed that the “index for shelter contributed over half of the monthly all items increase,” and was the “dominant factor” in the steady rise of core inflation. Along with shelter, the index for motor vehicle insurance was also a big contributor, rising 1.7% in October after rising 1.6% in September. 

It appears that the Federal Reserve’s plans to increase interest rate in an effort to lower inflation is now contributing to the rise in inflation. Another unintended, but highly foreseeable, consequence of the Fed’s actions is that when mortgage rates hit 7% as they currently stand for a 30-year mortgage (a 16-year high), the cost of purchasing a home gets further out of reach, especially for first time homebuyers and minorities who had seen a slight boon during the pandemic when mortgage rates were less than 3%.

It’s clear that the Fed doesn’t have any other plans but to keep raising interest rates and President Biden has no plans whatsoever. The Biden administration has admitted they were wrong about inflation, and now we are trusting them to right the ship. Instead of forcing Washington to curb spending, get the debt under control, lower taxes, boost domestic manufacturing and productivity, and grow small businesses, Washington Democrats will continue to do the same thing and expect a different result.

Bob Carlstrom is President of AMAC Action 


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Patriate Henry
2 months ago

Yes max, that is very concerning. So many forms of apathy within our citizenry. Hey WE THE PEAPLE…. what do you really want ????. GOD save the USA….

PaulE
2 months ago

The general economic illiteracy of the American public is slowly killing this country. Our current high inflation levels have been triggered by two distinct sources: One was the intentional hiking of energy prices in this country by the Biden administration intentionally reducing the supply of oil and natural gas produced, shipped and refined domestically. This triggered an international response in the global energy markets that increased oil and natural gas prices. Everything in our economy is dependent on cheap, reliable and plentiful energy. When that input cost is radically increased for a sustained amount of time, a cooresponding price increase ripples throughout the economy to compensate for it. The second inflationary trigger was the massive and unnecessary spending by the Biden administration, which flooded the economy with zero cost dollars looking for goods and services to be spent on. Thus bidding up prices across the board and causing a massive economic distortions.

The Federal Reserve has one tool to combat inflation. That is to raise interest rates high enough to crush demand and, in most cases, cause a recession of either mild or deep proportions. A blunt tool which historically the Federal Reserve has wielded poorly. The problem with what the Fed is trying to do is the Biden administration wants to continue stoking high inflation by spending massive amounts of money. Case in point, all the fiscal stimulus spending associated by the so-called Infrastructure Bill (that wasn’t really infrastructure), the Chips Act (that again was basically designed to only assist a poorly managed Intel and create more federal bureaucracy bloat), and the Inflation Reduction Act (which had NOTHING to do with reducing inflation, but was merely a climate change and tax hike bill). So what we have is a Federal Reserve trying to crush inflation (via slowing down the economy and creating higher unemployment rates), while the Biden administration is simultaneously doing everything in its power to stoke more inflation through runaway spending in the name of “Progressive change”. Is it really any wonder why the Federal Reserve rate hikes to date have proven to be so ineffective? One is being canceled out by the other and neither side seems to want to tell the American people the honest truth about what is going on for the same political reason.

Max
2 months ago
Reply to  PaulE

I am surprised at the lack of comments and interest from the readers on this subject.

PaulE
2 months ago
Reply to  Max

I’m not. I am disappointed to be proven correct, but not surprised even though it is a vital subject impacting everyone. The subject doesn’t lend itself to the usual meaningless rant that passes for discourse on this site and most others. Which is why I wrote the first sentence of my comment the way I did above.

When I worked at the Federal Reserve, it became clear to me quite quickly how limited the Fed’s toolset actually is and how binary their view of the economy is. The Federal Reserve is trying to correct a fiscal mismanagement problem using a toolset that is only effective against a monetary issue. Which will cause a lot of massive economic pain for most Americans along the way over the next 2 to 3 years.

Max
2 months ago
Reply to  PaulE

Understood.

Smike
1 month ago
Reply to  PaulE

Unfortunately, general illiteracy of the American public has been the hall mark of my country for many years over a lot of important issues like this. I lost my job, my wife, my family, my career and everything I had because of the apathy of a misinformed American public. I love this country but don’t have a lot of faith in the “American Public” in general.

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