Aggressive Interest Hikes Expected as US Inflation Hits Record Highs

The Fed is preparing to aggressively hike interest, to combat the soaring inflation rate.

The current rate of inflation is really high. It's actually, uncomfortably high.

In January, the consumer price index, which is used to measure inflation in the US economy, rose 7.5%, marking the largest annual increase in 40 years. Inflation also showed no signs of slowing down, increasing 0.6% on a monthly basis—the same rate as in December.  Both measures were higher than predictions.

What’s getting more expensive?  Everything, actually.

The usual suspects: Energy, vehicle parts and goods, and services related to the pandemic restrictions (e.g. airfares, event admissions) accounted for approximately half of January’s price increases.

What accounted for the other half?  Food prices skyrocketed at their fastest pace since 1981, apparel prices spiked 5.3%, and, as anyone who’s recently surfed Zillow knows, home prices also soared, gaining 4.4%.

This rate of inflation is uncomfortably high

Many Americans have seen their incomes rise significantly in recent months, yet wage gains in January (5.7%) were far lower than the rate of inflation, resulting in significant price hikes for consumers. According to analysis, owing to inflation, the typical US household is spending $276 more each month.

What can be done? The strategy of merely waiting until supply chain bottlenecks are resolved is not working, and many economists argue that aggressive action is required (if not way past due).

The Federal Reserve appears to have noticed the problem. It is rapidly reducing its pandemic-era stimulus measures and intends to begin a series of rate hikes in March in an effort to cool down costs.

With rate hikes expected to happen soon, the concerns now are how many there will be and how severe they will be.

It'll be tough for Fed Chair Jerome Powell to figure out how to do that. Bringing down price growth to more reasonable levels without slamming the brakes on a rapidly growing economy will be his daunting job. The last time inflation was this high, in the early 1980s, Fed Chairman Paul Volcker increased interest rates—which calmed inflation but also caused a recession.

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