CUNA Economist: Expect Early Fed Action on Inflation

Inflation continued to its rapid rise in November, leading a CUNA economist to predict the Fed will start to tighten its monetary policy in the first half of next year.

The U.S. Bureau of Labor Statistics reported Friday that the Consumer Price Index rose 0.8% from October to November after seasonal adjustments, down slightly from the 0.9% gain in October. Prices over the past 12 months are up 6.8%.

“Inflation continued to surge in November,” Dawit Kebede, a CUNA senior economist, said. “Supply chain disruptions, higher demand for goods that continue to exceed pre-pandemic levels and increases in COVID-sensitive items such as shelter contributed to the rise.”

In previous months, the Federal Reserve had been focused on supporting maximum employment and considered inflation spikes to be transitory due to supply chain issues.

“Now the Fed seems to be concerned with stabilizing prices since COVID-related disruptions may not ease up soon,” Kebede said. “There are expectations the Federal Open Market Committee will announce at its meeting next week that it will end asset purchases before June. This will pave the way for possibly of raising the federal funds rate in 2022.”

NAFCU chief economist Curt Long also said he expected November’s inflation increase will convince the Fed to hasten its pace for ending asset purchases.

“Doing so would open the door for liftoff beginning in March, with June being the most likely candidate for the next rate hike,” Long said.

Long said many analysts think inflation will begin to subside in December. Energy prices were a major factor for the increase, but wholesale prices sank quickly following the announcement of higher production targets from OPEC.

Vehicle prices continued to contribute to inflation. The seasonally adjusted CPI for new cars rose 1.1% from October to November on top of a rise of 1.4% in October. The used vehicle CPI rose 2.5% in November, the same as the previous month.

Over the past year, inflation was 11.1% for new vehicles and 31.4% for used cars and trucks.

Cox Automotive reported Friday that the average new car sold for $46,329, up 0.7% from October and up 13.2% from November 2020. Last month it reported used car list prices were $26,971 in October, up 1.6% from October and up 25% from a year ago.

NCUA Chairman Todd M. Harper on Thursday said despite the economy’s recovery, credit unions need to pay heed to threats from new COVID-19 variants and inflation.

“It has been almost 40 years since most Americans had to worry about inflation,” Harper said during a speech given at an online meeting of Women in Finance & Housing, a group based in Alexandria, Va.

“Yet, inflation remains elevated at 6.2%, according to the consumer price index.”

Harper said inflation is widely expected to ease, especially after supply chain disruptions end.

“However, the Federal Reserve acknowledged that it now appears that factors pushing inflation upward, such as difficult to predict supply disruptions, will linger well into next year. In addition, the Federal Reserve notes with the rapid improvement in the labor market, slack is diminishing, and wages are rising at a brisk pace.

“All of these conditions add additional inflationary pressure,” Harper said. “Persistently high inflation could lead the Federal Reserve’s Federal Open Market Committee to remove its monetary policy accommodation earlier and more aggressively than expected, boosting short-term interest rates.

Higher rates typically cause consumers and businesses to constrain their borrowing and spending. Also, if short-term rates rise more than long-term rates, the yield curve will flatten, putting downward pressure on net interest margins at many credit unions and banks,” he said.

“Although economic forecasts point to a near-term steepening of the yield curve, the overall interest rate environment will remain challenging, especially for credit unions and other financial institutions that rely primarily on investment income.

“The ability to manage interest rate risk will remain a crucial determinant of a financial institution’s performance going forward. To remain on a sound footing, all financial institutions will need to continue to pay careful attention to the fundamentals of capital, asset quality, earnings, and liquidity in the months ahead,” Harper said.