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  • Writer's pictureEdward Ballsdon

Is tight monetary policy causing inflation....?

Updated: Apr 22

Update 14 Feb 2024: The ex Fed Economist, Claudia Sahm, included the following comment in her opinion piece in the FT:


"In fact, the Fed is pushing up home prices, because the people who have low, fixed-rate mortgages are unwilling to sell. So new homebuyers are grappling with higher mortgage rates, high home prices and a lack of homes to buy."


This is a demonstration that Monetary Policy can CAUSE inflation to rise in some components, and such basket components should be excluded when analysing underlying inflation that is impacted by natural consumer supply/demand balances


RESEARCH CONTENT


Following the deep dive into US PCE inflation, as well as into the UK, Canadian and Australian economies, it is clear that tighter monetary policy is linked to housing rental inflation.


This research presents a "True Core" inflation rate for the US, UK, Australia and Canada. This rate strips out those items whose changes in price are not necessarily linked to excessive consumer demand but instead to

  • government fiscal policy (e.g. sin taxes, income taxes etc)

  • central bank monetary policy (e.g. mortgage rates, housing rental costs)

  • weather, war, strikes etc (e.g. food, energy) which mean revert over time.


The results throw up some difficult data for Central Banks given their current policy and statements.

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