There are a host of things driving inflation higher, and the Federal Reserve's ability to control most of them is limited.
NEW YORK (CNNMoney.com) - More things feed inflation than a central banker can shake a stick at, and there's a growing worry that some of them won't respond to the Federal Reserve's biggest stick: higher interest rates.
Some economists say rising energy prices are bleeding through to affect the broader economy. Others point to the rise in housing prices during the recent real estate boom. Some even say that due to a quirk in how the government measures housing prices, a weaker real estate market can actually make inflation seem higher.
Others worry that old standards such as a falling dollar or rising wages in a tight labor market could become problems.
The one thing they agree on is that the Fed's main policy tool - raising rates - won't do much to curb any of these causes, especially in the short term.
A time of rising inflation readings amid signs of a cooling economy is, "the trickiest time to figure out what's right for monetary policy," said Bernard Baumohl, executive director of the N.J. research firm, The Economic Outlook Group.
Can the Fed put the inflation genie back in the bottle? Here are the factors that are pushing core inflation readings high enough to make the Fed uncomfortable.
The Fed's most recent statement at its May 10 meeting said "the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation." But some economists say it's not that simple.
"Even indirectly, energy has an impact (on core inflation), especially when it goes up this much," said David Wyss, chief economist with Standard & Poor's. "And there's a lag there. We still haven't fully adjusted to $70 oil."
Wyss and other economists noted that transportation companies have been imposing surcharges to cover rising fuel costs - and the economy is strong enough so that customers are paying them.
And air fares have jumped about 12 percent last month, on average, from a year earlier.
The reason the Fed traditionally looks at so-called core inflation is that its policies have a limited effect on food and energy prices, which are dictated by world market forces.
Unless the Fed rate hikes push the country into a deep recession, curbing demand to move people and products, the rate increases by themselves aren't likely to bring energy prices down from near-record levels.
Housing prices and mortgage rates are up from a year ago but that's not even counted in the Consumer Price Index and other measures of inflation.
Instead, government statisticians measure housing costs using something called "owners' equivalent rent," which estimates how much it would cost home owners to rent their own homes.
That figure has jumped 3.3 percent over the past 12 months, one of the biggest increases in the various components of the core CPI, even as the real estate market has cooled. The reason? Last year's jump in home prices, and mortgage rates, has made buying less affordable, driving up demand for rentals - and rents.
That's driven up government calculations of owners' equivalent rent, which are based on market rents, and called into question that part of the government's main inflation gauge.
"When demand for housing falls, that will increase the demand for rents," said Baumohl of Economic Outlook. "That's a sign the economy is cooling off, but that will put upward pressure on owner equivalent rent."
So even if Fed rate hikes cause the housing market to cool further, that could mean higher, not lower, readings for the housing portion of CPI, which accounts for about 30 percent of the index.
Meanwhile, the housing boom has fed inflation in another way: By putting billions of dollars into the hands of consumers who used falling mortgage rates to take cash out of their homes as they refinanced.
"A lot of the inflation has been introduced into the system through mortgage credit," said Peter Schiff, president of Euro Pacific Capital, a securities firm specializing in global investing. "That's where all these dollars have been created and spent. You have the immediate ability to access the appreciation (in your home) through borrowing."
A weaker dollar
The dollar is down about 6 percent so far this year versus other major currencies, and many are forecasting further declines, especially if the Fed stops raising rates while other central banks around the world raise rates.
A falling dollar can be inflationary.
But so far there's been little sign that exporters overseas are raising prices, which could boost the price of imports. The U.S. import price index is basically where it was last November.
For the most part overseas companies seem willing to accept slimmer profits rather than raise prices, according to Baumohl. "If they chance it and raise prices, they risk losing customers and market share here, which they're not willing to do," he said.
This is the traditional cause of inflation. A tight job market can push wages higher, raising costs for employers, who raise prices, spurring workers to seek raises. And so on.
But so far in this economic cycle, many economists say this is one area where inflation pressures are limited.
The Labor Department's Employment Cost Index shows wages in the first quarter rose just 2.7 percent from a year earlier, less than the 4.2 percent rise in overall CPI for the 12 months ended in May.
And rising productivity has helped keep something called unit labor costs - which employers pay to produce a certain amount - in check.
"Unit labor costs are still pretty good at this stage of an expansion," said Gus Faucher, director of macroeconomics for Moody's Economy.com. "Right now we're not seeing that much in terms of labor costs causing inflation."
But there is one area where U.S. businesses are getting hit by rapid wage growth - some of their overseas operations, where they went to lower labor costs in the first place.
"It costs us about twice as much to hire someone in India as it did three years ago," said S&P's Wyss. "It's still a fraction compared to what it costs to hire the same person in the U.S. But we're hiring skilled people, and that's getting in tight supply."
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