The news from the Federal Reserve confirmed what many had been suggesting in recent weeks: the U.S. economy is rapidly heating up. Concerns about the potential for inflation have been swirling in boardrooms and in the media for some time, making the report from the Federal Reserve not unexpected. All the same, the confirmation had a chilling effect on Wall Street where, across the board, stocks took a nosedive. The Federal Reserve has urged caution in reacting to the news, noting that while typically inflationary pressure is a cause for concern, todays’ economy is anything but typical. Rather, it should be expected that following the unprecedented economic slowdown associated with pandemic-related closures, rapid growth would occur as limits are lifted and spending resumes. Indeed, a major contributor to current inflationary pressure is surging demand for cars and trucks. Used car and truck prices were up more than 7 percent last month even after rising 10 percent the previous month.
Prior to the measured announcement by the Federal Reserve, American companies were already facing rising prices on raw materials and skyrocketing labor costs. Now, there is also the potential that the cost of business loans will also increase. As part of its announcement, the nation’s central bank indicated that it may be forced to raise interest rates earlier than anticipated, albeit probably not until 2023. Previously the central bank had targeted 2024 as the earliest date for an interest rate hike. Perhaps more unsettling for companies though, was Federal Reserve Chairman Jerome Powell’s statement that he is willing to move more quickly should circumstances warrant quicker action suggesting that we may be in for a bumpy ride.
Discussion Questions:
1. What is inflation and what are its implications for the economy? What is driving the current inflationary trend?
2. Many students are balancing both student loans and car loans. What could happen to the price of loans like these in an inflationary economy?
3. Have you noticed a rise in the price of everyday purchases like gas and groceries? What needs to happen at the macroeconomic level to bring prices back down?
3. If companies are paying more for raw materials and labor, what happens to the price of the product or service they are selling? Discuss the implications of your response for the economy as a whole.
Source: WSJ: Fed estimates inflation will grow faster than projected just 3 months ago and moves up expectations for rate hike, Photo by Blogging Guide on Unsplash