Despite Fed's rate hikes, inflation fight far from over
Sault News, The (Sault Ste. Marie, MI)
Ask anyone who needs to fill a fridge to feed a family and they'll tell you that inflation hasn't cooled one bit for them since the Federal Reserve rolled out three rate hikes since March.
When, exactly, do all the price hikes stop? Not tomorrow, that's for sure.
We know for certain that the Fed's fight is far from a quick fix for the worst inflation we've seen in 40 years — and it's far from over.
On Wednesday, the Fed raised interest rates for the fourth time in five months and another, though smaller, rate hike is expected to follow at the Fed's next meeting Sept. 20 and Sept. 21. After September, experts predict that we're in for another three rate hikes by early 2023.
July's 75-basis-point rate hike put the short-term, federal funds rate at the target range of 2.25% to 2.5%. That range moves interest rates, which had been ultra low during the pandemic, into a neutral category.
It's a dramatic back-to-back 75-basis-point hike after the Fed's similar move in June.
The Fed noted Wednesday that inflation remains elevated but the economy also is seeing spending and production softening.
The Fed acknowledged that job gains have been robust and the unemployment rate has remained low.
The Fed blamed high inflation on "supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures."
Russia's war against Ukraine, the Fed said, is creating additional upward pressure on inflation and are weighing on global economic activity.
Federal Reserve Chair Jerome Powell said in his news conference Wednesday that he does not believe that the U.S. economy is in a recession right now but demand has slowed in the second quarter.
"We're not trying to have a recession and we don't think we have to," Powell said. "We think there is a path for us to be able to bring inflation down while sustaining a strong labor market."
Powell said the rise in inflation has surprised the Fed and others on the upside this year, noting that inflation is "much too high."
Higher prices for essentials, like food, heating homes, and transportation, create financial hardships for those who are living paycheck to paycheck, he said.
"People who are making relatively low wages, they're the ones who are suffering the most from inflation," Powell said.
Powell said the Fed will be focused on getting inflation back down and on a path to the 2% range.
"Price stability is really the bedrock of the economy," Powell said.
What does the Fed hike
mean to your wallet?
The federal funds rate is the rate that banks charge each other to borrow money overnight but it is important to consumers and businesses because it is a key benchmark that directly influences the interest rates on many loans.
At this point, borrowers are seeing higher interest rates but they're not seeing stratospheric jumps in interest rates on car loans and some other products.
Mortgage rates did skyrocket to an average of 5.54% for a 30-year mortgage as of July 21 based on Freddie Mac data, up from 2.78% for the same time a year ago. The housing market has turned sluggish, thanks to higher rates, inflation and ongoing worries about a recession ahead.
Going forward, many economists aren't expecting mortgage rates — which aren't directly tied to the federal funds rate — to edge up much higher after the latest rate hike.
Consumers will pay more to take out other loans, though, and put more debt on their credit cards.
Car loans are expected to move up from an average 4.86% now for a five-year loan for a new car. But borrowers won't see an automatic across-the-board hike of 75 basis points on car loans after Wednesday's move by the Fed because car loan rates aren't directly correlated to Fed moves, according to Greg McBride, chief financial analyst for Bankrate.com. Instead, he said, lenders take competition and other factors into account when pricing car loans.
Where consumers will see an immediate, more direct hit is on their credit card bill.
Credit card rates will rise to around 18% on average, up from the average of 17.25% now, according to Bankrate.com.
"Credit card rates will mimic the 75 basis point hike since they are predominantly indexed to the prime rate," McBride said.
Why inflation is hard to control
Typically, the Fed initiates interest rate hikes to cool off the economy and control inflation by making borrowing more expensive. For years, the Fed was out in front of inflation and rate hikes did help cool things down.
Yet we're dealing with a wackadoodle economy here in what many optimistically refer to as the post-pandemic world.
Inflation has roared ahead for more than a year after major supply chain disruptions drove up prices on many goods and demand heated up after government relief efforts put more cash in the pockets of consumers. Then, Russia's invasion of Ukraine in February led to dramatic price hikes for gasoline and fueled inflation further.
The U.S. economy could be on the fringe of a recession — or it might not be.
The numbers relating to the nation's economic growth in the second quarter will be released Thursday. The nation's gross domestic product fell at an annual rate of 1.6% in the first quarter — which was a significant shift from an annual increase of 6.9% in the fourth quarter last year.
A general rule of thumb definition of a recession is two consecutive quarters of negative growth. But that's not the final word on the matter.
The National Bureau of Economic Research determines the official dates for recessions and does not go by the two quarter rule. Instead, the group states "a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
Right now, the jobs picture looks too good for many to say we're in a recession.
But consumers feel stressed out anyway because they're being squeezed by far higher prices for practically everything on their shopping lists.
Even though interest rates remain relatively low, many consumers don't have much extra cash in their budgets to keep borrowing at higher rates or in some cases keep up with their payments. They're dipping into savings or pulling out credit cards because wage gains aren't keeping up with inflation.
"Prices are going to remain high and that's going to continue to be a strain on lower income households," said Kurt Rankin, a senior economist at PNC Financial Services Group.
Higher prices already have driven many financially stretched families to take on more credit card debt to cover their everyday groceries and bills. And, ultimately, some consumers could face harder times when higher interest rates on those credit cards catch up with them.
Credit card balances were $71 billion higher in the first quarter through March 31, compared with the same period last year, representing a substantial year-over-year increase, according to data from the Federal Reserve Bank of New York.
Credit card balances rose about 9.2% year over year, reaching $841 billion in the first three months of 2022.
The financial squeeze has been particularly intense in the Midwest where consumer prices in that region rose 9.5% over the 12 months through June.
The Consumer Price Index nationwide surged by 9.1% for the 12 months through June, according to the latest data from the Bureau of Labor Statistics. It was the the largest 12-month increase since November 1981. July data will be released on Aug. 10.
The June inflation data was a "major league disappointment," according to Federal Reserve Governor Christopher Waller in a prepared speech July 14.
Core inflation — which doesn't include price changes in food and energy — dropped slightly in the last couple months, Waller said, averaging more than 6% in 2022.
"And is too high as well," Waller said. "No matter how you look at the data, inflation is far too high."
PNC's Rankin told the Free Press that the Fed has to move aggressively to get inflation under control.
"The Fed is doing its job and that's fighting inflation," Rankin said.
He said the Fed had to show — especially after the transitory debacle where Fed officials indicated last year that inflation was temporary — that it was serious about inflation.
If it's a choice between a mild recession — which could be possible in mid-2023 or so — or allowing inflation to persistently continue at this intense pace, he said, the Fed is making the right move by aggressively tightening and raising rates this year.
If we see a recession in the months ahead, experts say the hope is that job losses will be minimal as the Fed fights the flames of inflation.
Rankin said he believes that many employers have kept hiring out of concerns that employees have been quitting. Some of that "stockpiling" of labor is likely to ease up.
Rankin expects another 50 basis point hike at the Fed's September meeting and two 25 basis point hikes at Fed meetings in November and December. And then, he expects another 25 basis point hike on Feb. 1 at the Fed's first meeting in 2023.
The Fed, he said, won't likely raise rates after early next year but could ease and cut rates in December.
"While price growth is going to ease, prices are not coming back down unless it's a commodity-based product that we're talking about, like oil, gasoline, things like that," Rankin said.
People aren't going to see sudden price cuts on a wide variety of items at the grocery store, car lot or the mall.
"Ultimately," he said, "these rate hikes slow down future inflation."
"Econ 101 says you don't stop inflation unless you have less demand or more supply and more supply just doesn't seem possible anywhere in the near term," Rankin said.
And it could take the rest of this year or longer for many supply chain issues to ease up. The Fed has to slow down economic activity, which, unfortunately, may not help some supply chain issues because higher interest rates can discourage businesses from producing more.
How did we get here? Does it matter?
Did prices rise so rapidly because of incredible demand, driven in part by a flood of stimulus cash and other economic relief to shore up the economy during the pandemic?
Or did prices rise so rapidly because of supply shortages and bottlenecks? It was most likely a bit of both.
Supply chain issues make things more complicated for the Fed, as the Fed can't do anything to fix bottlenecks or potential COVID-19-related outbreaks and disruptions out of China.
Low inventories of cars and trucks — plus high demand continue to be a major obstacle for the auto industry and it has pushed up costs for consumers. Supply chain disruptions drag on as problems with semiconductors hamper production.
On average, drivers were dishing out $648 a month for new cars and trucks bought in the first quarter this year, according to data from Experian. And the average payment for used vehicles rose to $503 a month, going above $500 for the first time.
Oddly enough, Experian noted that the average interest rate for a new vehicle decreased from 4.15% in the first quarter last year to 4.07% in the first quarter in 2022.
The total car loan amount hit $39,540 on average in the first quarter, up nearly 12% year-over-year, according to Experian. The average loan taken out to buy a used vehicle early this year soared nearly 25% year-over-year, to reach $27,945 in the first three months of 2022.
"The massive payments households are making on automobiles are a byproduct of the amount being borrowed," Bankrate.com's McBride said.
Don't blame the uptick in interest rates for those higher payments, he said. McBride noted that the monthly payment on a new five-year car loan for $35,000 would be up roughly $11 a month after the past three rate hikes, compared with a loan taken out a year ago.
The average rate on a new five-year car loan is 4.86% currently, up from 4.18% a year ago.
Will things get better?
While inflation has continued to be frustrating for many consumers, some signs of relief appear to ahead in the next several months, according to Omair Sharif, founder and president of Inflation Insights in Pasadena, California.
"A lot of leading indicators of inflation have moderated," Sharif said.
"We are seeing a noticeable pullback in gasoline futures, which precede changes in retail gasoline prices," he said. "And gas prices, of course, are falling."
Many food commodity prices have fallen quite sharply, he said, which suggests some relief ahead at grocery stores in the second half of the year.
He noted that wage growth has moderated, too.
Contact Susan Tompor:[email protected]. Follow her on Twitter @tompor.