By: Russ Kamp, Managing Director, Ryan ALM, Inc.

The Federal Reserve claims to be data driven. If that is truly the case, we are likely in for a longer rising interest rate cycle. I’m not referring to either of today’s major statistical releases – Retail Sales and the NAHB Homebuilder Survey – both of which blew past expectations. No, I’m basing my expectations based on the information produced by the Cleveland Fed that measures the median price increase for all of the CPI constituents. Regrettably, this index continues to rise.

Despite the positive inflation trend related to Goods, which clearly showed a transitory nature and one related to production disruptions, the median constituent in the inflation calculus is rising, with half of the inputs now above 7%. It isn’t just eggs, folks! This latest development clearly demonstrates to me that the Fed has accomplished little to date. They certainly have a major job ahead of them if they truly want an environment in which inflation moderates (plummets) to 2%. As we’ve been saying since the onset of this inflationary cycle, strong labor markets that are enjoying above trend wage growth are not likely to suffer significantly diminished demand for goods and services, which is exactly what we are currently experiencing. 

One can blame the warm weather all they want when it comes to retail sales, home buying activity, travel, etc, but the fact is that this enhanced demand is keeping inflation elevated. As we’ve been stating, the strong labor market and decent wage growth will make it difficult for the Fed to tamp down inflation unless they get much more aggressive. Forget about a great “pivot” occurring anytime in 2023.