Significant interest rate hike ahead as inflation continues to soar

Borrowers should be prepared for even higher interest rates, much like packing extra cash to cover more absurd price hikes on the next trip to the grocery store.

It’s a done deal.

Some sort of treble – the third straight time the Federal Reserve will try to win the fight against inflation by raising interest rates by 75 basis points – is most likely a sure thing next week, experts say.

Soaring inflation and a tight labor market pushing up wages give the Fed yet another reason to raise short-term interest rates by three-quarters of a percentage point at its next meeting on May 20-21. September, according to Omair Sharif, founder and president of Inflation Insights in Pasadena, California.

The current short-term federal funds rate is in a target range of 2.25% to 2.5%. But another 75 basis point increase would push rates into a range between 3% and 3.25%. The benchmark rate will be the highest since 2008.

The Fed hasn’t raised rates this quickly in over 40 years. September’s rate hike will be the fifth since March. The Fed raised rates by 25 basis points in March, 50 basis points in May and 75 basis points in June and July.

The pain for borrowers continues to be quick and steep.

Credit card rates skyrocket to nearly 19%

Those with credit card debt will face higher monthly payments and increased financial pressure as credit card rates rise rapidly. Credit card interest rates are not fixed and eventually follow each Fed rate hike.

On average, credit card rates are expected to reach 18.75% over the next few months, based on an expected Fed rate hike of three-quarters of a percentage point in September. According to Greg McBride, chief financial analyst for Bankrate.com.

The average credit card rate hasn’t come this close to 19% since shows like “Seinfeld,” “Friends” and “Home Improvement” hit the buzz in 1996.

The Credit Card Accountability and Disclosure Act of 2009 shook up credit card pricing years ago, pushing issuers away from fixed rates and offering variable rate cards that scale with customers. rate hikes. Now, issuers charge higher rates for those with lower credit scores to begin with. Before the law, credit card companies had much more scope to raise interest rates without notice to borrowers – often easily raising rates when borrowers showed signs of financial difficulty.

Auto loan, mortgage rates are rising further

Consumers buying a new car later this year and early next year can also expect to pay more for a car loan. The five-year average auto loan is expected to hit 5.5% over the next few months, McBride said, from 5.08% now and 3.95% a year ago. Auto loan rates had been around this high level in 2012.

The 30-year fixed mortgage rate – which is not directly linked to short-term rates but is influenced by inflationary pressures – is expected to reach between 6.25% and 6.5% over the next month, said McBride. . That’s up from an average of 6.03% today and 3.05% a year ago. Mortgage rates last reached this level in 2008.

Savers only see a slight boost

Savers are seeing modest gains as rates on attractive, high-yielding one-year CDs are expected to rise to around 3.5% to 3.75% in the coming weeks, McBride said. This goes from around 2.9% to 3.2% currently and to 0.7% a year ago. You have to shop around for those higher CD rates because the average rates remain extremely low. The average one-year CD rate is currently 0.66%, compared to 0.17% a year ago.

High yield CD rates had not reached these levels since 2009.

The Federal Reserve appears to be much less concerned about the possibility of a recession now than about the debilitating long-term impact the economy faces when the rapid price increases of many daily purchases continue unchecked.

The war on inflation rages on

High inflation hurts purchasing power, but unpredictable price increases also make it much more difficult to budget for the future.

The Fed’s mandates are full employment and price stability.

“From the Fed’s perspective, job and wage growth remain elevated to the point where they will likely continue to drive inflation,” Sharif said.

A still strong economy is “probably too hot for the Fed’s liking,” said Sharif, who indicated some were already speculating another 0.75 percentage point rate hike could be in the works at the Fed meeting. the Fed on Nov. 1 and 2.

“It’s a bit premature in my opinion,” Sharif said.

But he noted that the consumer price index for August clearly shows a strong level of inflation which indicates that the Fed will not stop on rate hikes anytime soon. The Fed, he said, is likely aiming to use future rate hikes to achieve a short-term federal funds rate above 4%.

Inflation is proving quite tenacious and not easing much. As many warned decades ago, it’s hard to put the inflation genie back in the bottle.

The latest inflation report for August indicates that consumer prices have risen 8.3% over the past 12 months. Inflation would be even more worrisome if we didn’t see a 10.6% drop in gas prices in just one month.

On a month-to-month basis, the consumer price index for all urban consumers rose 0.1% in August after remaining unchanged in July, according to the US Bureau of Labor Statistics.

The price increases in some regions were much worse than others. Food, for example, was up 11.4% in the past 12 months to August. The home food index has risen 13.5% in the past 12 months, the biggest 12-month increase since March 1979.

Utilities also rose substantially, with electricity up 15.8% and gas service up 33% year-over-year.

In the Midwest, some relief from inflation has arisen. The consumer price index for all urban consumers in the Midwest fell 0.2% month over month in August, according to the Bureau of Labor Statistics. The price index for the Midwest, including Michigan, rose 8.1% in the 12 months to August.

The Fed is expected to raise short-term rates by 0.75 percentage points in September, then raise rates by 0.5 percentage points in November, according to Sung Won Sohn, president of SS Economics in Los Angeles.

“It won’t be the end of the tightening cycle. There will be more hikes in 2023,” Sohn said.

He said the inflation rate had peaked as some bottlenecks in the supply chain eased. But he noted that the inflation rate will remain well above the Fed’s 2% target and will more likely be in the 4% to 5% range for a few years. He puts the chances of a recession in 2023 at around 60%.

“On the demand side,” Sohn said, “massive government spending during and after the pandemic financed by printing money will mean relatively high inflation for a few years to come. strangulation and labor shortages continue to contribute to inflation. History shows that once inflation is on the way, it is difficult to control. It takes a lot of time and pain.

The tight labor market creates its own challenges, as companies often end up offering higher wages in the race to find workers. And higher labor costs are passed on to consumers, Sohn said.

Some service industries, including retail and restaurants, are facing severe labor shortages as many employees in lower-paying service jobs move on to higher-paying opportunities.

“Labour shortages will persist, which will keep prices high,” Sohn said.

Contact Susan Tompor: [email protected]. Follow her on Twitter @torment. To subscribe, go to freep.com/specialoffer. Learn more about Company and subscribe to our business newsletter.



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