Inflation has been an ongoing concern both in the region and nationally. For example, when the Federal Open Market Committee (FOMC, the main policy implementing arm of the Federal Reserve Board) met on January 25 & 26, many expected they would decide to start raising the target federal funds rate (which has remained at the 0-1/4 percent target since March 2020). It turns out the FOMC did not advise a rate hike at that meeting, but the language from the committee meeting’s statement (minutes have yet to be released – I believe they should come this week) make this almost a certainty for their next meeting on March 15 & 16.
Because the target federal funds rate serves as a baseline interest rate, all sorts of other interest rates follow along – such as the bank prime rate and, crucially mortgage rates, which have already risen steadily since late last year, in expectation of a Fed hike.
Rising inflation rates are entirely to blame for coming rate hikes. When the Fed sees inflation, they attempt to pump the brakes on the economy by raising interest rates, which increase borrowing costs and slow the economy down. Inflation continues to rise nationally; all items inflation was up 7.5% year-over-year in January. Energy prices continued to soar, and food inflation was also up 7% year-over-year. Even the month-to-month increase in the seasonally adjusted index, which had been slowing down and causing economists and markets some relief, came in higher than expected – at 0.8% month-to-month between December 2021 and January 2022.
The coming rate hikes by the Fed will raise mortgage rates through 2022, and they might even slow economic growth, all in the name of reining in inflation.
Inflation is even higher in the Inland Empire. The Inland Empire’s price index, which is published bimonthly and is not seasonally adjusted, showed an 8.6% increase in the “all items” index between January 2021 and January 2022, which, among major metro areas, is lower than only Atlanta, Phoenix, and Tampa. Broken down into its components, many of the same expenditure categories are to blame for the inflation we’ve seen over the past 9 months: Energy (12.3% year-over-year – mainly gasoline but also utility prices like electricity and natural gas) and Transportation (24.0%). Housing (7.9%) was also high, but mostly because of the increase in utility prices and not necessarily because shelter or rents are trending higher than they were in previous months. Food and beverages rose 5.8%.
The table above is an update of a table I’ve used in past articles to convey how spending components are generating inflation – for example, here. Notice the higher housing inflation – but this is due specifically to the “utilities” subcomponent of housing, which has taken off in the last few months. Aside from that, most of the components look stable with just a bit of increasing pressure causing the higher headline (8.6%) rate.