Inflation too high for Fed to stop tightening

Here is the Commerce Department’s inflation report. The Federal Reserve puts more emphasis on the PCE inflation index than the CPI. (Treasury uses the CPI to adjust I-Bond and TIPS yields.)

Too Hot for the Fed to Stop

Employment costs and other inflation measures cement a Fed increase next week and possibly later too

By Justin Lahart, The Wall Street Journal, April 28, 2023

Investors have been hoping the Federal Reserve’s message following next week’s policy-setting meeting will be “hike in May and go away.” But recent economic data suggests the central bank won’t be able to do that.

The Labor Department on Friday reported that its employment cost index rose a seasonally adjusted 1.2% last quarter from the fourth quarter, stronger than the 1% economists polled by The Wall Street Journal expected. That put it 4.8% above its year-earlier level—not far below the 5.1% it clocked in the fourth quarter, and much higher than Fed policy makers think is consistent with their 2% inflation goal.

Also Friday, the Commerce Department, in its monthly report on personal income and spending, said that its measure of overall consumer prices was flat in March from February, but that its measure of core prices, which excludes food and energy items in an attempt to better reflect inflation’s underlying trend, rose a seasonally adjusted 0.3%. That put core prices 4.6% higher than year earlier…[end quote]

From the same month one year ago, the PCE price index for March increased 4.2 percent. Prices for goods increased 1.6 percent and prices for services increased 5.5 percent. Food prices increased 8.0 percent and energy prices decreased 9.8 percent. Excluding food and energy, the PCE price index increased 4.6 percent from one year ago. This is much higher than the Fed’s target of 2% and it isn’t declining fast.

The Fed isn’t going to be happy about the 5.5% increase in services. Some of this is rising rents, which may slow in the future. But a lot of it is rising incomes which tend to build on themselves. Wage-price spirals were a factor in the 1970s inflation.

The market has been over-optimistic about the course of inflation and the Fed’s path before. I think that the banking crisis is behind us. The Fed won’t be deterred as the market hopes. I also think that inflation will be stickier than the markets expect.

There’s no question that the Fed will raise the fed funds rate 0.25% on May 5. I think they will continue to tighten after that, disappointing the markets at the same time that Congress is fighting over raising the debt ceiling.

The stock market has done well up to now in 2023. It’s possible that “Sell in May and go away” will apply this year more than most.



Since it’s pretty clear that all of the Fed’s tightening so far has (if you believe history) not yet had any effect on inflation, this entire chain of reasoning is nonsense. Effectively, inflation has mostly cured itself with no Fed action at all.

The relevant question is whether, once the tightening has some effect on the economy, starting this summer or maybe next winter and ending within a year or so after(?), will it reach the desired endpoint? Pretending that a system with long latency should be adjusted based on current data is absurd. Skating to where the puck is now is not how you win.

And since that’s rather long and tedious, here’s some analysis:



That is not clear at all.

It’s not where they want it, but saying “it’s had no effect” is to ignore, well, evidence. The Fed started increasing rates one year and one month ago. Following two months of continuing increases, the inflation rate has dropped every single month since . That’s 11 in a row, for those who are counting.


Inflation has not stopped, nor gone down, in any of the 11 months.
It has just simply stopped going up as fast.

So if you are getting punched in the mouth a lot, and over time, you get punched in the mouth a bit less each month, you are still getting punched in the mouth every month when you really don’t want to be punched at all.



Hi Wendy,
And so I believe Fed will raise rates, and keep them raised, higher for longer or H4L as the kids like to say.

So what does this mean for businesses and their stocks, especially tech stocks?

While plenty of tech firms are large conglomerates, many more are small to mid-cap firms without endless access to cheap capital. Tech stocks focus heavily on research and development, so they often reinvest excess profits back into the firm and don’t keep a lot of cash on hand (well, except Apple). Even large-cap companies launching new products or services must borrow money to finance their ventures.

“When interest rates rise, the cost of borrowing capital also increases, which isn’t felt evenly throughout the different sectors of the market. Banks like JPMorgan Chase and Co. (NYSE: JPM) or utility providers like Duke Energy Co. (NYSE: DUK) usually don’t suffer as much when rates are rising since they don’t need capital infusions the way tech stocks do.”

So we will pivot to tech stocks once the Fed finally does start lowering rates, right?


"Rates plummeted following the dot-com bust in 2000, but it wasn’t enough to save tech stocks from falling harder than the rest of the market. The federal funds rate stayed around 1% until 2004, then steadily rose to 5% in 2007 before the Great Recession. Despite rising rates, the tech sector didn’t materially underperform the S&P 500 during that time frame. Following the Great Recession, rates stayed near zero until 2016. From 2016 to 2019, rates jumped over 2% from zero, but tech outperformed the S&P 500 during these three years. "

Moral of the story?
Much like the cocky “this time is different” investors from late 90s into the blowoff March 2000 peak, I think the tech investors from 2016-2021 period have lost the narrative a bit.

Fed will keep rates up until inflation buckles and/or something major “breaks” and the pivot will come when we are hurtled into a soft or hard recession.

Stocks won’t immediately benefit due to the lowering rates at that point, cause…duh…recession.

This is a kobayashi maru scenario. The middle and lower classes can not handle this inflation…their savings will be exhausted by Q3 or so this year and loan defaults will be on the rise. This will naturally cause deflation/recession, but probably with a harder landing and massive job layoffs as companies find their one-trick-pony of raising prices on shrinking demand only works for so long and can only fool wallstreet during ER’s for so long. Bye bye stocks in that scenario.

So Fed wants to aim for softer landing by inducing the deflation labor sooner rather than later, but, at best, they likely break a few things and will still get a recession. (but maybe a cuddlier one…like a build-a-bear that looks like Powell)

In summary:
Gonna short the market
Gonna wait
Gonna buy the recession



Nobody ever wants Inflation to “go down” negative as your words suggest. That is called a depression a la the 1930’s. (Actually a deflationary depression) To see a high inflation rate ie the 8 or 9 % it was 1 to 2 years ago become a lower inflation rate (whatever it is at the moment I keep hearing 5% - 6% - even 3%) is exactly what the program calls for. So stopping it is not the plan and certainly making it “go down” is never the plan.


See if you can spot the outliers here…

In the previous 10 years prior to 2021, inflation averaged 1.73%
So public school math says $100 item now costs $118.70

In past 3 years, we are averaging 5.9% inflation per year.
So $100 item from 3 years ago costs $118.76

Congrats to the Fed printing machine…we have been able to accomplish so much in such a short period of time. Indeed.

of course, the reality is the $100 item from 13 years ago is now $140…cause, like, the pace of rate increases slowing doesn’t negate the fact that inflation, to your point, doesn’t typically revert.

I hope everyone makes 40% more now than they did 13 years ago. I think I am actually close to that, but I may be more fortunate than majority of middle/lower class.



I really hate it when replies to what I’ve said are totally disconnected from what I said. Makes it hard to hold a conversation. NO NEGATIVE INFLATION. The only time we had that was for a few months on or about the 2008/2009 bust and people were crapping themselves over what it might cause if it got a permanent foothold. That’s why all that Gov intervention. To prevent intractable NEGATIVE INFLATION. Aka Deflation. But have a nice day.

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Thanks…you, too!


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Apparently it’s clear to the NBER folks I referenced. They probably understand this better than you. And they say that actions similar to what the Fed has been doing have, in the past, caused inflation to go down starting at least a year after the Fed’s initial actions.

That “evidence” shows correlation, not causation. You should know the difference. What Romer & Romer are saying is that the effects of the Fed actions will be seen several months from now at the earliest. So they will be in addition to what we’ve seen already, which has been caused by other things.


Goodie for them. Meanwhile auto loans are down, significantly. The number of home mortgages being applied for are down, significantly. Maybe they should read the statistics?

I do know the difference. You can’t have causation without coorelation, but I know a lot of people who chime this trite phase when they dion’t have anything else to point to.

I’ll say it again. The rate of inflation has been trending down for 11 months straight, the phenomenal coincidence being that the Fed began hiking interest rates 13 months ago. Gosh, it’s almost like they’re moving in tandem or something.


Inflation is defined as the rate of change in prices. If that rate goes from, say, 5% to 4%, then inflation has gone down. Prices haven’t declined. But inflation has. That’s not a matter of opinion; it’s definitional.


Yeah, that pretty much proves causation. Not.

For some reason, I don’t find your repeating yourself to be persuasive.


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But the fed wants it to go up, just slowly. Slowing down the increase is the entire point. The LAST thing the Fed wants to do is create deflation.


Tip: things happen faster now. Bank runs took months to wreck the economy in the 1930’s. They took weeks during the conflagration of 2008. SVB and Signature took days. Internet meme stocks pump and dump issues and take dead stocks to new heights in hours. Why is it so hard to believe that moves by the Fed to cool the hottest parts of the inflation surge (easy credit for houses, real estate, and automobile) are translating more quickly into the general consumer economy than they used to?



I should note that this machine has a lot of moving parts, and the Fed is only one of them.

  • Others include unwrinkling the supply chain as happened during the pandemic (helping lower inflation).

  • Workers trying to play “catch-up” to compensate for their loss of buying power (helping increase inflation).

  • Oil prices coming back down from a pandemic spike (pushing energy inputs lower)

  • Unemployment remaining ultra-low (giving workers more bargaining power)

  • Pandemic “relief”: people taking more and longer vacations. There are fewer restaurants now, Covid having closed many, competing for fewer workers but increased customers (putting upward pressure on prices).

  • World events, particularly Ukraine. This affects different segments differently, obviously.

  • Expectations: everybody knows prices are increasing, making them move purchases forward, stockpiling, increasing demand artificially. (Upward pressure)

The Fed’s only (visible) lever is to try to let some air out of the tires of the overheated credit/shadow banking sector: housing, autos, consumer credit, business credit. The needle is moving, albeit slowly. In spite of the bank failures exacerbated by the increasing rates, I expect another increase (small) at the next meeting.

In spite of what I see as “progress”, there’s still too much going on for the Fed to say “We’ve won”, which in any case they haven’t - yet.


I am probably not articulating my concern very well.
I get the concept of inflation “rate”.

If the ideal/desired was 2%, we are now well into year 3 of way over-shooting that target.

So even if we get to 2%, at end of 2023, the damage is done, because you added in years-worth of inflation increases in 2021 and 2022 and 2023-to-date. Those prices typically aren’t getting unwound.

Free money created artificially jacked up economy. Businesses react and position accordingly. Free money ends, but like a roller coaster that has already crested, gravity is going to keep things moving quickly. Habits form, business plans and investments are made.

Then things fall apart slowly. Then suddenly.

Savings are depleted. $1000/mo auto payments made when flush with cash start to look like a horrible idea. All the goods/services bought regularly that have an extra 15-20% cost due to past 3 years of inflation add up against the household budgets. Workers clamor for wage increases to combat the inflation. Companies raise prices more to offset the increase in wages. Companies raise prices on a declining demand…and that can be masked only for so long.

“And it’ll get a little confusing because you’ll hear inflation numbers that start to sound lower, but you’ll have to remember, that’s on a two-year stack,” McMillon stated, according to Fox Business. “So if inflation in dry grocery and consumables is only three or five, that’s on top of 15. And that’s still a problem for the customer and a pressure in their wallet.”


So there is no victory lap. The skier crashed and smashed their head, got up and seemed ok. Then died of a hematoma. That is the current economy, imo.

Everything coming is just a delayed reaction to everything that already happened.



Year 2, but quibble. Inflation started to increase in the summer of 2021 - nearly exactly two years ago per your own chart.

And inflation NEVER goes back down. It would take DEFLATION to bring it back down. We NEVER came back down from the inflation in the 70s. New cars never went back to $5000. Doesn’t mean we can’t have decades worth of success once (high) inflation is over.


No, they look brilliant, so long as your income has also been boosted to compensate for inflation. Remember just a couple years ago how ludicrous “Fight for $15” sounded? Oops, it’s here. If you bought a house three years ago with a 3% mortgage you were a genius. Of course that cuts the other way for people who need to buy one now, but that is a tiny fraction of the populace.

For historical perspective, my parents bought their first house for $3000. Their next one was over $100,000, and now it would sell for $600,000. But then my father’s salary was $10,000, then $75,000, then $125,000, so it wasn’t like he was making 1953 wages but buying a 2017 house with it.

The rate of inflation is coming down . It will never go negative - or if it does it will be nearly the end of the world. Nobody will buy anything, because it will all be cheaper next month, and that will crater the economy.

Sure. Some people will lose, particularly those who are not financially savvy. Meanwhile many will win. See any breadlines yet? No? How’s the unemployment rate? Really really good. How about egg prices? Whoops, back down, along with gasoline. Beef? Whoops, higher.

It is going to take some time for people on the lower tiers to “catch up”, if they ever do. (One of the bigger drivers of inflation’s persistence, at the moment.) That’s the way it was after WWII, in the 70’s, and again after 2008. The big surprise is that those people generally do, although some never will. That’s life. TS.

Needlessly pessimistic. We’ve been through far, far worse and come out the other side even better. In my lifetime I’ve seen inflation at 15% topped, wars fought, oil blocked, terrible drought, Presidents shot, pandemic unlocked, and disco. As the song says “We’re still standing.”


Maybe not a breadline, but as I’ve posted here before with links, the need for additional food resources to help families put food on the table each day has been growing according to those folks that are “on the ground” volunteers who are distributing food through local food banks.

The lines are longer than many volunteers have ever seen them…


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