CUNA: Record Inflation Will Lower Borrowing
Economist says Fed rate-raising to control prices will also lower demand for goods and loans.
CUNA Senior Economist Dawit Kebede said Wednesday’s report that inflation grew in December at the fastest pace in nearly 40 years will mean faster Fed action to raise interest rates, which will ultimately slow borrowing.
Kebede and NAFCU Chief Economist Curt Long said the Federal Reserve will most likely raise interest rates earlier than anticipated to control inflation. This would be in addition to ending its support for the economy in the form of large asset purchases.
“This will raise the cost of borrowing for consumers and will reduce excess demand for goods,” Kebede said.
The Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) rose 7.0% for the 12 months ending December, the largest 12-month increase since the period ending June 1982. On a seasonally adjusted basis, the all items index rose 0.5% from November to December after rising 0.8% in November.
“Increases in the indexes for shelter and for used cars and trucks were the largest contributors to the seasonally adjusted all items increase,” the BLS news release said.
Food prices also contributed, although less than in recent months, and the energy index fell in December, as prices for both gasoline and natural gas decreased. The index for all items less food and energy rose a seasonally adjusted 0.6% in December following a 0.5% gain in November.
Long said rising costs for shelter, which rose 0.4%, and used autos, which rose 3.5%, are creating a high floor for core inflation, which has increased by at least 0.5% for the sixth time in the last nine months.
“Given the enduring shortages in housing and new auto inventory, it is likely that price pressures will remain above the Federal Reserve’s target for the first half of 2022, even if energy prices continue to drop,” Long said.
Kebede said supply chain disruptions, a high demand for goods that exceeds pre-pandemic trends and labor shortages increased prices for most consumer items.
“A prolonged surge of the Omicron variant may continue to push prices higher by worsening labor shortages and supply disruptions, which showed signs of improvement in December,” Kebede said. “Recent price increases in housing contribute the most to overall inflation given their larger weight in household spending. This may show a shift from goods to services as the main driver of inflation moving forward.”
Long said that with unemployment falling below 4%, the inflation pressure will create the necessary conditions for two rate hikes early in the year: One in March and another in June.
“Beyond that point lies plenty of uncertainty, as the inflation outlook could improve or the Fed could forego a rate hike or two in favor of a faster balance sheet runoff if long-term rates remain low,” Long said.