On Thursday, while editorializing around the slowest pace of US existing home sales since 2010, I reiterated an important point which one hopes is becoming clear to Fed officials: High rates can be inflationary.

In the housing market, the dynamic is simple enough. Anyone who bought or refinanced in 2020 or 2021 has a rate they aren’t likely to give up. Sure, someone who owns their home free and clear and who’s content to move into a home of equal or lesser value, might be willing to sell, but if you intend to finance any portion of a trade up, you’re not especially likely to swap a two- or three-handle mortgage for a seven-handle.

High rates are therefore constraining supply. And the attendant dearth of resale inventory in housing is a key factor propping up prices. In fact, it’s the key factor.

There’s also a mechanism whereby high rates can be inflationary on the demand side. As Bloomberg Intelligence pointed out, “higher rates mean savers receive additional income, boosting consumption and prolonging the economic cycle.”

Of course, not all banks have been quick to raise deposit rates which, together with the mini-banking crisis in March, explains why Americans have plowed $973 billion into money market funds so far this year.

Over the past 12 months, the figure exceeds $1.1 trillion, and it’ll almost surely rise further from here.

That money is earning more money. And quite a lot of it, at that.

Money market funds are now generating more than $22 billion per month in interest income.

That’s a huge windfall and, along with other sources of interest income, it’s probably helping to support spending.

In fact, BI suggested that the increase in personal interest income could be “adding more than 1% to GDP,” assuming Americans are spending it all.

As Nomura’s Charlie McElligott put it, “It seems that the Fed is starting to get the joke that higher front-end rates may in fact be inflationary and growth-stimulative.”

Coming full circle, higher rates are also inflationary on the supply side, at least as it relates to the read-through for home prices of the resale inventory shortage.

So, you could fairly argue that high rates are now contributing to inflation on both the supply and demand sides of the economy.