Economics 101: What rising interest rates and inflation mean for you

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The price of just about everything has gone up.

Inflation, the rate at which prices are rising in the economy, is the worst in 40 years. The Federal Reserve, the central bank of the United States – better known as the Fed – announced earlier this month that it was raising its benchmark interest rate by half a percent. This marked the largest rate hike since 2000 and is a direct result of rising inflation.

Fed Chairman Jerome Powell said further interest rate hikes were likely.

But what does all this mean for you?

This means that the cost of borrowing has increased. If you have credit card debt, your rates will go up. Variable rate mortgages and home equity lines of credit will also be affected.

Risa Kumazawa, an associate professor of economics at Duquesne University’s Palumbo Donahue School of Business, teaches a course called “Principles of Macroeconomics.” She spoke with the Tribune-Review and explained what you need to know.

Question: What is inflation and what causes it?

To respond: Inflation simply means that prices are higher. There is always inflation in the economy. Prices are still rising. But when it becomes a problem is when prices are so much higher than the year before. We are experiencing inflation that is not the usual norm. In the United States, prices are (typically) increasing by about 2% to 3% per year. But (now) we are suddenly facing an 8.5% (increase) in March of this year compared to March of last year. We have therefore deviated from the norm, which is why this inflation is on everyone’s mind.

Q: How would you sum up what is currently happening with the economy and what we are seeing with inflation?

A: It’s the perfect storm – with Russia going to war with Ukraine, the supply chain issue, higher demand, things not shipping fast enough and prices going up for some things in the economy. People face unexpected higher prices. The first place people notice it is at gas stations. The only thing whose price has skyrocketed is oil. Your gasoline now costs much more (per gallon) than before. Russia’s war with Ukraine certainly played a part in this. Russia is one of the main oil supplier countries in the world. It is therefore a blow for the countries that imported oil from Russia. This usually comes with higher food costs, and we certainly see that as well.

Q: Is it like a domino effect? Are rising gas prices having an impact on food prices?

A: They do this because when truckers ship things, or if you fly things, gas costs are involved, so the sellers of those products also raise their prices to make a profit.

Q: How do you arrive at the 8.5% figure to show how much prices have increased over the last year?

A: We follow several prices in the economy. You not only monitor the price of gasoline, but the price of food—milk, bread, eggs—we monitor all of those prices as well. We have a way of combining all of these individual prices into what is called the Consumer Price Index (from the Department of Labor) and then when we take the percentage change we can determine the rate of inflation in the ‘economy.

Q: So this is what our current inflation looks like, and it’s not good for consumers. The Federal Reserve responds to inflation by raising interest rates. What is the Fed, what is it for and why is it raising interest rates?

A: The Fed is considered the country’s central bank. It conducts monetary policy, which includes lowering and raising interest rates depending on the health of the economy. The Fed lowers the interest rate to stimulate a slowing economy. It impacts the major purchases people make – cars, homes, appliances. If there’s a lower interest rate that people are going to pay, they’re going to spend more, and that’s how the economy gets a boost. The Fed is also raising interest rates to combat a high inflation economy. When interest rates are high, people aren’t going to spend as much because you’re going to pay (more money) for your car loan, your mortgage, your credit cards. (Consumers) aren’t spending as much, so prices will come down. But by slowing the economy, it could lead to a recession. The Fed has decided that the issue of inflation is a big enough problem to fight this one.

Q: When do we as a collective economy feel the pinch, and what is the worst thing that can happen?

A: The worst thing, I think, is that because of these (higher) interest rates, the Fed is actually pushing us into a recession. This is the worst that can happen in this scenario.

Paul Guggenheimer is a staff writer for Tribune-Review. You can contact Paul at 724-226-7706 or pguggenheimer@triblive.com.

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