Pain of inflation and high interest rates

Inflation, which is the general rise in prices of goods and services, hurts our pockets, so to relieve that hurt, the Federal Reserve raises interest rates to make it more difficult for us to access money so we spend less and the suppliers are then compelled to lower their prices, due to lower demand for their products. In spite of the Fed raising interest rates numerous times in the last year, there has been little dampening of inflation. In March, inflation was down, primarily due to declining food and gas prices, but, according to pbs.org, "core prices kept rising and are 5.5% higher than a year ago." The Federal Reserve is contemplating raising interest rates yet again. Now that is where the issue arises.

Interest rates are the price of borrowing money. It is what individuals pay when they borrow money for any number of reasons. The higher interest rate makes it more difficult to borrow money, slows down the economy, and may lead to a recession. But the problem is not even that. For those of us who are borrowing money for various projects, paying adjustable rate mortgages, paying on credit card loans, etc., it is not pleasant.

Mortgage Interest Pain: Assume you were interested in buying a $300,000 home, which was $250,000 before inflation, now, the fixed 30-year mortgage rate, which was 2.67% in December 2020 is now 6.27%, more than double, in April 2023. So the homebuyer has to contend with both inflation and a higher interest rate, which has not helped make the home any cheaper. For those with fixed rates, they are locked in. However, for those with adjustable rates, the rates will keep adjusting upward, as the Fed continues to ratchet up the rates. Note that the rate you get will depend on your credit profile and history.

Credit Card Interest Pain: The pain is felt by all those with credit card debt. Remember the "buy now pay later" holiday shopping gimmick? If you owe on your credit cards back in December, the interest rate was around 18%, now it is almost 21%. According to CNBC, "collectively, Americans owe more on credit cards than ever before." All other forms of debt such as auto loans are also up; as a result, total consumer debt is up to $16.9 trillion.

All debts were up at the end of 2022, and the increase in interest rates only makes it worse. Debt is a problem that only gets worse as interest rates increase.

Now, it is up to individuals to compare how much they were spending with high levels of inflation and low interest rates with how much they are spending now with moderate inflation and high interest rates. Those in a large debt position are probably worse off, depending on how much they were spending on various goods and services. Note that you will be spending significantly more on increased interest payments than when inflation was at its highest and interest rates were low. Those in a relatively low debt position may not be as bad off. Personally, with my work on charity projects, my debt level is high, and the high interest rates are extremely worrisome. Now the Fed wants to continue raising interest rates until they have inflation under control? So far, the rises in interest rates have not had the impact on inflation that they expected. So there is the pain of continued inflation and now the newly imposed pain of higher interest rates. And some of us just don't like it one bit.

Kojo Quartey, Ph.D., is the president of Monroe County Community College and an economist. He can be reached at kquartey@monroeccc.edu.

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Kojo Quartey

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