Money Matters: No hooray as inflation hits the FED target rate

Yahoo Finance’s latest news is that the U.S. inflation rate is approaching the Federal Reserve’s (FED) preferred rate of 2 percent.

Saints be praised!

So when will prices start coming down, you ask?

Let me answer that one for you and say, “Not in my lifetime and probably yours either.”

As detailed here in Money Matters many times, although the rate of inflation may be approaching the preferred 2 percent FED rate (according to their minions at the Bureau of Labor Statistics), the damage has already been done.

(Note: And it’s not 2 percent, by the way, but more like 4, but who’s counting?)

Although the inflation rate is slowing, prices of things are still increasing. And it’s increasing on prices that were yanked severely higher by the horrible inflation we experienced in the last three years or so.

When people stop me on the street after reading the inflation rate is close to the FED’s preferred rate, they often ask, “So when are prices going to come DOWN, Marc?”

Truth be told, people incorrectly assume if the rate of inflation is decreasing, prices will decrease.

Sorry, but we have a misunderstanding, sirs and madams.

The target rate of 2 percent means the prices pulled higher in the last three years are going to continue to go even higher by at least 2 percent a year. And the FED prefers this. They always want at least 2-percent inflation, as they believe this is healthy for a vibrant economy to grow. (Again, this analyst disagrees.)

So now what happens?

Seeing as the targeted rate by the FED has arrived at its benchmark, the FED will begin its crusade of lowering interest rates, making credit of all sorts easier to obtain. That will equate to more spending and higher consumer demand.

However, higher demand is by definition inflationary. Simple math, but the FED seems to have lost its calculator. The rest of us economists that remember Econ 101 scratch our heads in wonder. One does not lower rates if inflation is egregious, and I think there is little argument on that one.

Meanwhile, Wall Street and the banking industry celebrate the news that lower interest rates are ahead, as that will likely mean more money will be tossed into the markets, driving stocks and bonuses skyward. The banks will now also be able to lend more money to folks like you, making them more money. And isn’t that the way of it?

Meanwhile, back on the farm, Mom and Pop continue to struggle to make ends meet as the FED’s target rate of 2 percent persistently gnaws on their finances a little more each day.

Not only will us worker bees slowly continue to suffer the “preferred” 2 percent annual rate of price increases eroding our buying power, small businesses will also suffer and have suffered from inflation.

This year alone, nine more restaurant chains have filed bankruptcy. They are Mediterranean fast food chain ROTI, Italian food chain Buca di Beppo, World of Beer, Rubio’s, Cleveland-based Melt Bar and Grilled, Kuma’s Corner, Red Lobster, Tijuana Flats and Oregon-based Boxer Ramen. Not all household names, mind you, but good-sized chains nonetheless.

All have fallen victim to inflation and the COVID policy of the shutdowns. Right or wrong, the shutdowns damaged some balance sheets beyond repair and it is only now we are finding out who those businesses are.

Although some businesses weathered through the COVID shutdowns, some of their financial boats were so badly damaged it just took a little longer for them to hit the rocks.

In conclusion, inflation has and still is the most ardent threat facing consumers and small- to medium-size businesses.

Although Wall Street and Washington celebrate the FED’s so-called victory over inflation, the rest of us see the real deal of debt. The 2-percent inflation target goal of the FED is still hammering us folks on Main Street.

Put simply, everything is still too damn expensive and there doesn’t seem to be an end to it despite the cheers on Wall Street and in the ivory halls of Washington.

And them are the facts, Jack.

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]