The Federal Reserve just raised interest rates for the first time in years – it’s what people asked for but not what they wanted.
Americans don’t understand inflation. Recent studies show that even though they want to curb inflation, they don’t want to slow down their spending or deal with higher interest.
In fact, people are spending more than ever, according to TD Bank. Americans are spending about 15 percent more than they were before the pandemic. Eating out at restaurants is one of the most popular spending categories, alongside entertainment, fast food, and coffee. TD Bank also found that consumers are spending more on shopping – at the mall and online.
The supply chain isn’t able to keep up with this uptick, triggering more inflation. It’s economics 101 – higher demand means less supply which means higher prices.
Nationwide conducted their own study and found that the majority of Americans are stressed over rising costs and want the Federal Reserve to do something about it. But they might not actually know what that means.
On March 16, the Fed raised interest rates for the first time in three years. The Fed usually slows down inflation by raising the federal interest rate which affects things like credit cards, loan interest, and mortgage rates.
Even though people want the Fed to take action, raising interest rates makes them worried (37 percent) and frustrated (30 percent).
“Many Americans believe inflation is caused by something other people do. Maybe it’s too much government spending, or too little supply-chain investment. But one big cause is consumer spending – what you and I buy,” said Howard Dvorkin, CPA and Debt.com chairman. “We put the strain on the supply chain. We drive prices up when we drive our cars more than we did during the pandemic. As Fed chairman Jerome Powell has said, ‘pent-up demand’ – for everything from cars to airline tickets – is a major cause of the inflation we’re seeing right now.”
Find out: 5 Ways to Fight Back Against Inflation
Recovery isn’t coming anytime soon…
Our increased spending has definitely encouraged inflation, but saying it’s the only cause would be an oversimplification. Inflation can be complicated.
The war in Ukraine is a major factor. Ukraine and Russia are important exporters of wheat, gas, and other energy sources. Russia’s invasion and the sanctions that have been placed on them lead to higher prices across the board. Even if the war ends soon, agricultural and gas prices probably won’t bounce back right away.
The federal raise in interest rates is supposed to help by slowing down demand and increasing supply. But Powell from the Federal Reserve highlighted another issue in our current market during this month’s meeting. For every one unemployed person, there are 1.7 job openings.
“That’s a very, very tight labor market,” he said. “Tight to an unhealthy level, I would say.”
This gives employees the power to bargain for higher wages – which also prompts companies to keep raising prices.
While most Americans are feeling anxious as their purchasing power shrinks, corporate profits are reaching new highs. Some politicians point to price-gouging and greed.
Even though people are reacting by holding off on major life events like weddings, as of March, their day-to-day spending hasn’t gone down.
Over the past few months, Americans have shifted their focus from buying services to goods – a change that Powell said hasn’t helped economic recovery. The Fed plans on combating inflation by raising interest rates several more times this year.
“It has been a difficult time for the economy. But we do anticipate that inflation will move back down,” Powell said. “It may take longer than we’d like, but I’m confident that we’ll use our tools to bring inflation down.”
Published by Debt.com, LLC