Inflation Continues to Rise
If you are keeping score, inflation won another round against the Federal Reserve this past month. US inflation spiked 8.2% in September. Seemingly unbeatable, inflation continues to raise costs to punishing levels. Prices increased from August to September after rising from July to August.1
While the cost for goods has dropped slightly, the price for services has jumped. Hikes in rent, housing costs, healthcare and education are causing hardship. As inflation broadens into services, it becomes harder to bring down. Despite low unemployment, people are pessimistic about the future. An Associated Press-NORC Center poll said almost half of Americans describe their financial situation as poor.2
Economists are focused on core inflation, which excludes volatile food and energy. It gives a better picture of price trends. Core inflation skyrocketed from August to September and rose 6.6% over the past year. The yearly core figure is the biggest increase in 40 years.
In response to unbudging inflation, the Federal Reserve will keep raising rates aggressively. They have hiked rates five times in 2022 and there are more to come. This is the fastest pace of tightening since the early 1980s.3
Market expectations for the next hike have increased. Bond futures now indicate a 99% chance of a .75 percentage point increase at the next meeting. It was a 50% chance last month.4
Consumers aren’t alone in their view that inflation is here to stay. Minutes from the last Fed meeting show policymakers haven’t seen any progress in the inflation fight. They indicated rates will be raised an additional 1.25 percentage points over November and December. That would push the key rate to its highest level in 14 years.
Analysts fear the frenzy of hikes could cause a recession in the US and globally. Investors moving money into US assets for a higher return could cause upheaval in overseas economies. Despite risks, the policymakers, “emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.” They also said their hikes would slow the economy and increase unemployment for the next few years. Loretta Mester, President of Federal Reserve Bank of Cleveland said, “We cannot say that inflation has even peaked yet.”5
Wrong Inflation Solution
According to the saying, ‘To a man with a hammer, everything looks like a nail’. The Federal Reserve is wielding rate hikes like a war hammer. The problem is that rate hikes can’t solve all the causes of inflation.
The Fed thinks inflation is fueled by a tight labor market and high wages. The consumer spending surge was initially fed by stimulus checks. Now, companies are raising prices to take advantage of higher wages and consumer savings. Services are growing more expensive, in part, because of a lack of workers. Companies are forced to pay them more. They then pass those costs onto the consumer as higher prices. To policymakers, the solution is to increase unemployment with high interest rates. The Fed is basically waging war on US workers- the one group not directly causing inflation.
Other causes of inflation are beyond the reach of the Fed. It is driven by the war in Ukraine and supply chain snarls. The Russian invasion is sending gas and food prices skyrocketing with no end in sight to the conflict. Meanwhile, the chief economist at Morningstar said a slowly-healing supply chain forms a major reason why they don’t expect inflation to fall until 2023 or later. 6
Economists, business leaders and policymakers are realizing their worst fear might be coming true. High inflation, and all the damage it causes, may now be permanent. It may outlast aggressive rate hikes and severe recession. People are right to be concerned. An AARP poll showed 77% of adults over 50 are worried prices will outstrip their income. Before things get worse, investors should investigate protecting their wealth with safe haven assets like a Gold IRA. Contact us today to learn how it can help you secure your future.