Inflation
Here’s one reason the Federal Reserve keeps raising rates:
Inflation is actually greater than official reports indicate. Because of the methodology used, the Consumer Price Index (CPI) is understated by as much as half a percentage point. Prices in May, for example, actually climbed about 3.3% on an annualized basis instead of the rather tame 2.8% indicated by the CPI. And, in 2005, inflation will run roughly 3.5%, not the 3% we forecast for the CPI.

Blame it on housing costs. Since 1983, official CPI numbers have been based in part on “owner-equivalent rent” ... the amount a home would fetch in rent ... as a substitute for homeowners’ lodging costs. That method worked until house prices began to soar and rents sank, leaving a gap that distorted measurements. The problem is temporary. By mid-2006, that gap is likely to narrow as gains in home prices ease and the rental market gets hotter. That’ll make the whole issue moot.

The economy
A tighter labor market is shaping up. The unemployment rate fell to 5% last month, the lowest level since Sept. 2001. Meanwhile, the economy added 146,000 jobs in June, a healthy gain.

The faster pace of hiring will push up wages as workers feel more confident to look around for new jobs. Average hourly earnings have increased 2.7% over the past year and are a good bet to continue inching upward.
Rising wages bode well for economic growth by helping to fuel spending by consumers. But they also add to inflation pressures.

The rush to refinance shows no sign of slowing. People who missed the 2003 refinancing wave are moving to take advantage of today’s rates ... an average 5.6% on a 30-year fixed mortgage, down from 6.2% a year ago.
That’s more good news for the economy. Monthly mortgage savings plus the extra cash from refinancings let homeowners spend even more.

Congress won’t be too hard on Fannie Mae and Freddie Mac, the government-sponsored entities that hold $1.5 trillion of home loans and mortgage securities. Critics say they’re so heavily leveraged that a big jump in interest rates would force taxpayers to bail them out.
Key lawmakers have other priorities. They’re sold on arguments that a regulatory crackdown would pull the plug on the housing boom.

Supreme Court
The Supreme Court ruling on eminent domain won’t hold much sway.
Congress is moving to take the sting out of the recent decision, which says localities can take private property for economic development. Lawmakers will bar the federal government from seizing private land for development and prohibit the use of federal funds for such projects.
And many states are planning similar steps on their own.

As the president mulls a successor to Justice O’Connor ...
Businesses are casting a watchful eye. O’Connor was a friend. She opposed punitive damage awards, voted for limited business liability, took a narrow view on disability suits, and was against contract quotas. It’s unlikely any new justice could be a more reliable ally of business.

© 2005 The Kiplinger Washington Editors, Inc.