The citizens of the United States are feeling the pinch. It only takes a quick trip to the grocery store these days to feel overwhelmed by the high prices of all of your favorite foods. Feeding a family has become quite a challenge, and that is not to mention all of the other daily expenses that have gone up, such as school supplies, vehicles, and housing. And consumers who feel there is no end in sight are not wrong. Inflation seems like a runaway train, and the bad news is, the Federal Reserve says it won’t let up anytime soon.

Up, Up and Away: The Rise of Inflation

Every time the Federal Reserve tries to fight inflation, they raise the interest rates, hoping that they can stabilize the economy. Federal Reserve Chairman Jerome Powell spoke recently at the annual meeting in Jackson Hole, Wyoming, explaining that the Fed will keep raising interest rates.

The Fed has been no stranger to raising the interest rates this year. “The central bank has delivered four consecutive interest rate hikes over the last six months, moving in June and July to raise rates by 0.75%, the Fed’s largest moves since 1994. By raising borrowing costs, the Fed hopes to dampen demand by making home buying, business loans, and other types of credit more expensive.”

The country did receive good news in July, with lower inflation readings, but the Fed is still poised to raise the rates again, saying we are not out of the woods yet.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell said Friday.

With unemployment at a historically low 3.5% in July, Powell said the labor market remains resilient, but that the continued rate hikes could definitely affect economic activity, thereby creating a “softer” labor market. This, coupled with expensive credit, could have consumers feeling the squeeze as interest rates continue to rise.

“These are the unfortunate costs of reducing inflation,” Powell said. “But a failure to restore price stability would mean far greater pain.”

Current Trends

The costs of goods and services are definitely on the rise. The latest inflation data showed prices in America rose by 6.3% on a year-over-year basis in July, a notch down from the 6.8% pace measured in June. If you discount food and energy, the Personal Consumption Expenditures index showed prices going up 4.6%, compared to a year ago. Unfortunately, the Fed’s target is a 2% increase.

“In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause,” Powell said Friday.

The short-term interest rates are in the “neutral” zone, between 2.25%, which means that this will be neither stimulative nor restrictive.

Powell said more rate hikes will be needed, with “another unusually large” increase still on the table for the Fed’s next meeting in September. Looking ahead, the Fed is planning at some point to lower the rates, but they are not saying when.

The last few years have created the perfect storm for inflation, with supply chain issues left over from the pandemic, as well as shortages caused by the war in Ukraine, along with labor shortages around the globe. The new reality and the fact that high inflation will be around a while is a hard pill to swallow after a sustained time of low interest rates and low inflation.

Ramifications of Prolonged Hikes

The near double digit inflation in many of the world’s biggest economies has not been seen in 50 years. This has sent bankers, investors, and citizens scrambling to hang on to the status quo. Bankers need to rethink assumptions and the way they have been doing things for decades in order to balance higher inflation.

“Regaining and preserving trust requires us to bring inflation back to target quickly,” European Central Bank board member Isabel Schnabel said. “The longer inflation stays high, the greater the risk that the public will lose confidence in our determination and ability to preserve purchasing power.”

Banks need to make peace with business as usual even if there is nothing that is usual. “Even if we enter a recession, we have basically little choice but to continue our policy path,” Schnabel said. “If there were a de-anchoring of inflation expectations, the effect on the economy would be even worse.”

And even if banks want to right the ship, they cannot currently compete with the continued uncertainty of the world stage. With astronomical energy prices, the ripple effects are affecting economic elements big and small. Deglobalization, shifting alliances with regards to the war in Russia, and increased expenses all have made an impact.

“The global economy seems to be on the cusp of a historic change as many of the aggregate supply tailwinds that have kept a lid on inflation look set to turn into headwinds,” Agustín Carstens, the head of the Bank of International Settlements, said. “If so, the recent pickup in inflationary pressures may prove to be more persistent.” All this points to rapid interest rate hikes, led by the Fed with the ECB now trying to catch up, and elevated rates for years to come.

“For the Fed right now – it is crunch time,” said Peter Blair Henry, a professor and dean emeritus of the New York University Stern School of Business.  “The credibility of the last 40 years is on the line, so they are going to bring inflation down no matter what, including if that means collateral damage in the emerging world.”

The Fed is doing its best at the moment to circumvent a complete recession, but for those individuals and families who are just trying to make ends meet, inflation is certainly not making it easy. And the bad news is, things are bound to get worse before they get better.