By now almost every reader knows that inflation has hit full blast. Just ask any shopper wheeling a wagon with Pesach foods and you’ll hear how much food has gone up from just a year ago. Just a few days ago, we were flirting with $5.00 a gallon at the pump. President Joe Biden did the only sensible thing by releasing some of the strategic oil reserves to halt the spiraling prices. The planned release is supposed to increase supplies as a bridge until oil companies ramp up their own production, with administration officials estimating that domestic production will grow by 1 million barrels daily this year and an additional 700,000 barrels daily in 2023.
If this was going to make a dent in inflation, the move by the Federal Reserve Bank on March 16th was yet another major step that was specifically designed to stop the runaway inflation. The Fed, as it is called, raised interest rates by 25 basis points to halt prices that are rising at the highest level since the 1980s. The Federal Reserve lifted its policy interest rate for the first time since 2018 and penciled in six more rate increases this year as it tries to combat a burst of quick price increases. Cumulatively the six increases are supposed to stop the runaway prices.
But as consumers, it might not quite be the blessing that we anticipated. The hike in interest rates correspond with an increase in the prime rate which automatically triggers higher financing costs for many forms of consumer borrowing and credit. In more practical terms it would affect bank loans and, of course, the all important mortgages. Fed officials indicated the rate increases will come with slower economic growth.
The logic behind the modest, 25 basis point increase in interest rates is that it helps stop the spiraling higher costs but at the same time is not dramatic enough to curtail economic growth. So the economic growth becomes the big picture while prices are the by-products. The officials now admit that it will slow economic growth somewhat but not enough to derail our overall economic expansion.
“We are attentive to the risks of further upward pressure on inflation and inflation expectations,” said Jerome Powell, chair of the Federal Reserve. “The committee is determined to take the measures necessary to restore price stability. The U.S. economy is very strong and well-positioned to handle tighter monetary policy.”
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Committee statement said. “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
Prices are up 7.9% year over year, according to the consumer price index, which measures a wide-ranging basket of goods and services. Energy has been the biggest burden, as gasoline prices have risen 38% in the 12-month period. These are significant increases and impact the pocket books of most middle class citizens.
The Federal Reserve Act directs the Fed, as it is often called, to promote maximum employment and stable prices. Since 2012, the Federal Reserve has targeted annual inflation of 2% as consistent with the stable prices portion of its dual mandate. In August 2020, the Federal Reserve adopted average inflation targeting. That framework committed Fed policymakers to hold inflation above 2% for a time to compensate for stretches when the inflation rate fell short of that target.
What does this all mean for us everyday consumers?. Unfortunately not much! For one we are faced with many issues that have nothing to do with the traditional set of reasons for inflation. The list begins with Covid and continues on to supply chain issues, labor shortages, and now to the war in the Ukraine. The experts expect inflation to continue to go up throughout 2022 and possibly into 2023.
While the small increases in the interest rates may serve as speed bumps for prices, they cannot erase the multiple issues we are dealing with nowadays. While the increases may be the tools the Fed uses to deal with inflation, it will not necessarily be the remedy we as consumers are looking for.
The experts say that so long as other economic indicators show a positive bounce, they will not panic. For example, total nonfarm payroll employment rose by 431,000 in March, and the unemployment rate declined to 3.6 percent, according to the U.S. Bureau of Labor Statistics. Housing starts increased 11.8% to a seasonally adjusted annual rate of 1.679 million units last month, the highest level, the Commerce Department said on Thursday.
Yet, most polling data shows that the average citizen is swayed by consumer prices. One pollster put it this way: “When we say that people vote with their pocketbook, we mean that they act as consumers, meaning how much they have to spend to buy food and other essentials.”