How much sway does Fed’s interest rate policy have over residual inflation?

The latest consumer price report released on Wednesday, May 15, showed a slight easing of inflation in April. It was led by lower grocery prices and declining auto prices, both new and used. The Bureau of Labor Statistics said overall consumer prices rose 3.4% on the year and 0.3% on the month, with shelter and gas prices accounting for more than 70% of total monthly inflation.

Meanwhile, core inflation — which excludes food and energy categories — rose 3.6%. That is the lowest annual increase for core prices since April 2021.

Every bit of new economic data brings speculation on the Federal Reserve’s next move with its interest rate policy. The Fed has very few tools to help bring down inflation; the one it has used the most is hiking interest rates.

The Fed has vowed to keep interest rates restrictive until there is clear evidence inflation is on its way to the preferred 2% target. While markets had initially predicted the Fed would cut rates six times in 2024, now even two rate cuts is an optimistic stance.

“We’ve had a lot of trouble getting inflation down and I think there’s also the argument there where it’s like, ‘Are the Fed’s tools even the right tools to be fighting inflation? Are interest rates even something we should be paying attention to?'” said Kyla Scanlon, an economic commentator and author of “In This Economy? How Money & Markets Really Work.”

In April, JPMorgan Global Market Strategist Jack Manley told Bloomberg that higher interest rates are driving inflation at this point. Scanlon brought that up and pointed out that the highest areas of inflation may be outside the Fed’s control.

“Shelter inflation is a huge contributor to the print that we see in the consumer price index,” Scanlon said. “Auto insurance — something that can’t really be controlled by interest rates in a really big way — is also a huge part of the CPI print.”

Motor vehicle insurance is up 22.6% over the past year, according to the latest CPI report. Shelter is up 5.5% on an annual basis. Both are areas of spending that are necessary. In the latest inflation report, shelter and gas prices comprised more than 70% of the monthly increase for all consumer items. 

In an interview with Straight Arrow News, Scanlon spoke more about Americans feeling negative about the economy in contrast to the data, where inflation is slowing, unemployment is low and wages are up. Below is an excerpt from that interview. Watch the exchange in the video above.

Simone Del Rosario: You were really at the forefront of the bad vibes economy that we’ve unfortunately been living in for a couple of years now. We’ve gone through a lot. But I wanted to ask you, what is the biggest source behind the current bad vibes?

Kyla Scanlon: I don’t know, I’ve spent two years trying to figure that out. I mean, I think it’s really tough. We have a structural affordability problem; the housing market is a nightmare, inflation is a pressure cooker.

It would be silly to think that just because inflation is going down — so things are getting less expensive, less fast — that people would be feeling better. So I think that we have these structural issues that maybe aren’t being addressed as quickly as people want. That’s leading to negative consumer sentiment.

And then you can point to things like media headlines being extraordinarily negative. You can point to the polarization. The United States is just really disconnected right now. We all feel it, we all see it.

I think in that sort of environment, it’s difficult to have positive consumer sentiment, even if GDP is going up, even if the labor market is doing okay, even if inflation is slowing down. There are real reasons behind the negative consumer sentiment despite a relatively okay economy.

Simone Del Rosario: I like to say that there are the prints and then there’s the perception. You’ve talked about needing to be really good at media literacy when trying to navigate this. How much do you think the bad vibes are driven by this negative news coverage?

Kyla Scanlon: I think a lot. I feel like it’s sort of lazy to be like, ‘It’s just the headlines,’ but if you have a negative word in the headline, the click-through rate increases by 2.3%. If you have a positive word, the click-through rate decreases by 1.9%. So I think that sort of statistic just tells us quite a bit about what people are clicking on and what they’re consuming.

There was an article from the Center for Economic and Policy Research. They had this piece talking about how CNN was not covering the restaurant inflation metrics right. Restaurant inflation has slowed down and CNN had a piece talking about how expensive it is to go to eat.

So I do think there is this framing issue that the media has just because of the inherent business model. And of course, you’re going to feel bad if everything you read is bad.

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Straight Arrow News also spoke to Scanlon about the impact proposed tariffs on China could have on inflation. You can watch that interview here.