Higher interest rates await

And just like that the Federal Reserve (FED), after embarking on an interest rate reduction program, came out and warned last week, “Not so fast.”

With the price of oil increasing with the military action in Iran, inflation is likely to accelerate even faster than previously expected.

As detailed in last week’s Money Matter’s article, oil is a key ingredient of many products we buy. As the price of oil increases, this cost is passed on to consumers in higher prices.

As unexpected as the conflict was, the reality of higher prices now challenges the FED to act to preempt the inflation that is in the pipeline. This translates to tighter credit and dampening consumer demand, which means raising interest rates.

Whereas the markets and Wall Street expected rates to continue to come down, now the opposite is becoming a real possibility.

Already, higher prices are hitting consumer pocketbooks.

Unfortunately, I must now resurrect a warning I haven’t used in years when it comes to inflation, “You ain’t seen nothing yet.”

The conundrum the FED faces now was always going to occur and it was only a matter of time before they faced it. The sudden spike in oil prices has only hastened its arrival.

This conundrum was detailed in last week’s article but is worth repeating.

The inflation genie must be put back into his bottle quickly, as inflation somewhat resembles a wildfire. It must be extinguished quickly before it gets out of hand. Once it takes off, it is that much harder to stop, and the FED knows that.

With the consumer already stressed due to increased living costs, and the market reeling in a mild but persistent freefall, what is ahead will likely not be pleasant.

I don’t envy the FED. It is caught between a rock and a hard place. Like I said, they would have had to face this problem eventually. Inflation was never going to recede as promised by the FED and Washington. There was just too much money created during the Covid shutdowns to keep the world from imploding due to the business inactivity forced upon it. You simply cannot shut down three-quarters of the world’s businesses and expect it to recover without serious problems.

Many analysts, including this one, warned against such actions. We will never know if the shutdowns helped or hindered the virus’ spread. What we do know, however, is that the massive amount of government spending to keep the financial wheels of the world spinning, and the consumers of the world able to put food on the table, has resulted in the egregious and persistent inflation we have witnessed in the last three years.

The spike in oil now only makes the situation much worse.

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a BA in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. insurance services. Email: [email protected].