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Despite new data from the Commerce Department that indicates inflation may have finally peaked, rising prices have Americans more concerned than any other issue, even the Russian invasion of Ukraine. The growing fears of a potential recession have the White House worried enough that President Biden met with Federal Reserve Chair Jerome Powell to discuss matters. Straight Arrow News contributor David Pakman believes inflation has become weaponized by the president’s opponents who conveniently overlook the fact that a global energy crisis is the primary reason for the rising costs Americans are seeing.
So first and foremost, where are we seeing the most significant price inflation? And remember when we talk about inflation, it’s measured using the CPI, uh, CPI is based on a basket of goods and services. You can always argue it’s not the right basket. You can make that argument at any time for our purposes, because this is typically the indicator that’s used. It’s what we’re going to use today.
Inflation on a 12 month year, over year period peaked in March, uh, 8.6%. We saw a slight decline in April down to 8.3%. Remember that’s not per month, that’s in the 12 month period ending in that month. Uh, this increase has been mostly driven by energy. Well, what do I mean? Well, oil prices are high, which is making gas prices. High gas is part of that CPI, that consumer price index. Aviation airline tickets is part of that. And those were the area that increased the most in price over the last month. The reason airplane tickets are so expensive are a combination of demand that has resumed as the pandemic has waned and increased oil prices, which increase the price of jet fuel. And then you also have grocery store, uh, groceries, which are part of the basket of goods and services considered in the consumer price index. And part of the reason that groceries have gone up in price is due to the increased cost of trucking.
Much of our groceries are shipped across the country in trucks, trucks need fuel…diesel and gasoline, and those prices are up. So this is primarily to a significant degree, an energy led series of sort of an inflationary spiral. Now there’s one other aspect to this, generally speaking, and, and again, when we think macroeconomically, and now we’re gonna get into something that’s us specific. Everything I’ve just mentioned is basically global. It doesn’t have anything to do with Joe Biden. Domestically, one of the things we have enjoyed in the United States for a long time now are record low mortgage rates, up until very recently. Well, why are mortgage rates so low? Mortgage rates follow what’s called the federal funds rate, which is set by the federal reserve. This is the rate at which banks, uh, can, uh, banks can, can, uh, borrow money. And when you have very low rates, it encourages people to buy stuff because it’s cheaper to buy stuff and more people buying stuff raises prices, generally speaking.
So one of the tools that exists to slow down inflation is for the federal reserve to raise the federal funds rate, which they recently did by what’s called 50 basis points or half of a percent, 0.5%. The mechanism that’s at play here is imagine that you say, okay, I can afford a $1,500 mortgage payment. Great. That’s what I can afford based on my income. With rates at 4% for a mortgage, that means that when I think about I’ve got 40 grand for a down payment, I can afford 1500 a month and rates are 4%. That means I can afford a $300,000 house. Great. What happens when mortgage rates go up? Okay, everything else stays the same. You can still afford 1500 a month. You’ve still got your same down payment, but, but mortgage rates have gone up.
That means that your $300,000 house is now going to cost you 1650 a month. What does that mean? Well, you can no longer afford a $300,000 house. Now you need a house that’s 285. That puts downward pressure on prices. Low rates put upward pressure on prices. We have had significantly low rates in the United States for years now, and that’s been another upward force on inflation.
