The last few months have been loud with whispers of a recession, and even louder with rages of unaffordable costs of living and borrowing. The US economy has been in a yo-yo movement throughout 2022, experiencing the highest inflation rates in 40 years, followed by six increases in Federal Reserve interest rates. Many have felt the pinch of high prices of food, rent and gas, but don’t really understand what’s going on, and why. Here’s a quick snapchat to catch you up.
1.Why are Consumer Prices so High?
The Covid 19 pandemic shocked the world in 2020, forcing us all to stay in, and businesses to slow down. Lockdowns disrupted supply chains and workers fell short, causing a lag in production. As global economies recovered, consumer demand surged, but supply was not sufficient, leading to shortages. When there’s a shortage, prices increase. Think about it this way: when there’s too little of something, many people are willing to pay great amounts just to access it, bringing the item’s price higher. The principle applies: supply did not catch up to our level of demand, shooting prices up by 9.1% (from 2021), the highest inflation rate since 1981 . Supply chain bottlenecks, coupled with high demand and intense economic activity, all hiked the prices of necessities.
2.Where Do Interest Rates Come In?
With raging inflation and great strains on consumers' pockets, the Federal Reserve had to step in. One of the Federal Reserve’s roles is monitoring financial systems and ensuring they are conducive for a healthy American economy that provides for its people . This involves tightening the economy when there’s too much activity or giving it a little jumpstart when it's slow. The 2022 inflation has been a wildfire that the Federal Reserve is continuously attempting to put out through hikes in interest rates/borrowing costs. Simply put, they increase the cost of borrowing, so people borrow less, therefore spending lessens, resultantly cooling down economic activity and lowering consumer good costs. Interest rates currently range between 3.75% to 4% and are expected to rise until inflation gets to the 2% Federal Reserve target .
3.What About the Recession?
Sometimes tightening the economy can squeeze it beyond its limits. Increases in interest rates have left many anticipating a dip in economic activity (a recession), lessening consumer and investor confidence. People are afraid the economy may soon fail, so they hold back on spending and investing, which in turn, could lead to the economy failing, and people losing jobs.
Although the future is uncertain, all this is normal in an economic cycle and different aspects of it can be used advantageously. Keep reading our articles to stay in the loop of all things finance and economics!
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