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Red-hot inflation fuels talk of full-point rate hikes, slowdown, stock drops, debt concerns

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Consumer inflation continues to rise at a rapid pace, with the Federal Reserve further increasing its interest rate hikes at its next policy meeting, and the economy will fall into recession sooner rather than later.

Consumer prices rose 9.1% in June from a year earlier, well above economists’ average forecast of 8.8% and at the fastest pace since November 1981. Without the increase in energy and food prices, the so-called core rate rose 5.9%, well above estimates of 5.7%.

The price hike was broad-based, meaning that in some places consumers felt any respite from rising prices and there would be immense pressure on the Fed to take a giant step – such as a 100-basis-point increase in its benchmark fed funds rate. – to rein in prices, economists said. This can have broad, mostly negative, implications for the economy, financial markets and consumer finance.

50 basis points? 75? Maybe, a 100-basis-point rate increase.

Fed Chairman Jerome Powell said the Fed would likely decide between a 50- or 75-basis-point rate hike at its July meeting after last month’s policy meeting, but after consumer price data, economists didn’t fully agree. Took half a mark. table.

The Chicago Mercantile Exchange’s FedWatch tool shows a more than 80% chance for a full point increase at the Fed’s next policy meeting in two weeks, but most economists stick to their forecasts for 75-basis-point growth. However they acknowledge that the risks are for the upside.

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“The question that remains to be asked, especially after the Fed’s surprise move from a 50-basis point interest rate hike expected for the June Fed meeting, was a dramatic 75-basis point move after higher than expected last month.” In the Consumer Price Index report, is the 1% interest rate option going to be discussed at this month’s Fed meeting? said Quincy Crosby, chief equity strategist at LPL Financial.

Atlanta Fed President Rafael Bostic reportedly told reporters in Florida on Wednesday that “everything is going on,” including a 1 percent increase when policymakers meet again.

Federal Reserve Chairman Jerome Powell speaks at a news conference on interest rates, the economy and monetary policy actions at the Federal Reserve Building on June 15 in Washington.

Economic recession sooner rather than later?

Because the Fed believed inflation was “temporary” for so long and allowed inflation to run so hot, it must now “move policy rapidly and deeply into restricted territory,” says Ing. Chief international economist James Knightley said. “The Fed has acknowledged that weak growth is the price we have to pay to bring inflation under control. The risk of recession is increasing.”

Spent: Inflation means people are spending less, which can lead to a rapid recession.

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Bank of America Securities said on Wednesday it is now forecasting a recession in the second half of this year, as a sharp slowdown in consumer spending and higher rates are expected.

“With the recent rise in inflation coming from food and energy prices, commodities that face relatively low demand in the short term may be less available for discretionary purchases in homes,” a report said. “Financial conditions have also tightened, particularly in the mortgage market with a large uptick in home prices and high mortgage rates affecting affordability, slowing home sales and housing openings.

What happens to the stock and bond markets?

Analysts said major US stock indexes fell on inflation data and are likely to remain under pressure.

“A major risk for the stock now is how much inflationary trends have affected the results and outlook this earnings season,” said David Russell, TradeStation Group’s vice president of market intelligence. “Wall Street is already expecting the slowest profit growth since the end of 2020, so the mood could be quite grim with consequences in the coming weeks.”

And even more so because despite much discussion, inflation has shown no signs of peaking, some say. That’s because much of the growth coming from so-called core commodities like rents, medical care and transportation services is “sticky”, and shows no signs of slowing down, he said. In the past three months, the three-month annualized rate of core inflation was 7.9%, indicating that core inflation has also accelerated in recent months, Wells Fargo said.

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“We may not see a real peak for months if not until early next year,” Rusty Weinman, chief investment strategist at Orion Advisor Solutions, wrote in a commentary. “Most importantly, given general investor sentiment and the situation for extreme inflation compared to the latter, it appears that “pain trading” (i.e., the market causing the most pain to investors) is likely to result in fewer stocks and bonds. for the prices.”

What can consumers expect?

Changes in the Fed’s rate eventually expire and affect all other rates. So, with the Fed moving aggressively to hike rates, consumers should expect interest rates on everything from mortgages and auto loans to credit cards and savings accounts to rise sharply.

For example, the average credit card interest rate rose to 20.82% in July since LendingTree began tracking this data in 2018 and is unlikely to stop.

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“The Fed is far from raising interest rates — and many banks haven’t even completed implementing the Fed’s recent hikes,” said Matt Schultz, chief credit analyst at LendingTree. “So, there’s no question that the average credit card APR is only going to increase in the coming months. That’s bad news for people with card debt.”

Low interest rates are also difficult to find. Of the nearly 200 cards reviewed this month, only 54, or about half the number in January, had a minimum APR of 15% or less than those reviewed this month. This means consumers will have to act quickly and begin transferring balances to lower-rate cards or call their issuer to request a lower interest rate. Schultz said that about 70% of people who asked for one in the past year got some sort of reduction, with an average cut of 7 percentage points.

Consumers should also look at 0% balance transfer credit cards or low-interest personal loans, he added.

Medora Lee is a money, market and personal finance reporter at USA TODAY. You can reach him at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.

This article was originally published in USA Today: 9.1% rise in inflation could spell trouble for economy, stocks, loans

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