Consider This from NPR - With Inflation Soaring, The Fed Weighs Another Interest Rate Hike

Episode Date: July 25, 2022

Food, gas, rent — prices are climbing across the board. As inflation hit a 40-year high last month, millions of Americans are adjusting their spending and looking for ways to stretch their budgets. The Federal Reserve is taking action, too. Policy makers are meeting this week to consider whether and how much to raise interest rates in an effort to curb inflation. We talk to NPR's chief economics correspondent Scott Horsley and business correspondent David Gura. In participating regions, you'll also hear a local news segment to help you make sense of what's going on in your community.Email us at [e-mail] more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

We have all been feeling it. Everything is getting a lot more expensive. It was like $10 for a 12-pack of soda the other day, and I'm like, what the heck? And, of course, gas. You know, just seeing the gas going up, like, once it hit $4, you could see every week how much it was going up and, like, knowing, oh, it's not stopping. And I think by April or so, my husband started telling me that we were going way over budget on almost everything. This is Violet Olsik. She's a mom of four from Springfield, Oregon. And like millions of Americans, she and her family have had to adjust their spending. So we talked about some things we could cut back on.

Like we stopped buying alcohol, which isn't necessarily a bad thing, but we started buying like the generic brand sodas, you know, small things like that. The Olsiks have even had to limit where they take their kids. Usually like once a month in the past, we'd like to go to the coast so we can take them crabbing or we like to go out of town to go to like one of the kids favorite children's museums. But we kind of decided that like even if we got free tickets, it's just like on top of everything else, you know, just our regular gas expenses are just so much that adding the extra $30 to go out of town is just, like, it would just put us over the edge. highest level in 40 years. Consumer prices are up 9.1% from a year ago. And for the typical American family, it costs nearly $500 more every month just to keep pace with where things were a year ago. There's a lot of anxiety that we've accumulated over these past couple months. This is Arely Trujillo. She and her husband got married in November,

so still reeling from their wedding expenses, they got hit with the highest prices they've ever seen. I had left my job to move in with my now husband, and I wasn't working for a while. And our rent had gone up, obviously, because we moved out of the places that we were living. That's not surprising, because the rental market is also wild right now. According to Redfin, listed rents on available properties are up 14 percent nationally. In some cities, they are up 30 percent or more. That is well over the rate of inflation. I feel like if we had been in this situation a couple years ago, we wouldn't have been as financially stressed as we felt now.

We've canceled subscriptions such as Amazon. I think we also canceled Hulu. We're kind of on the fence on Netflix right now. Trujillo started taking the train to work to save on gas money. I'm lucky enough to have that option. My husband doesn't really have that option due to his commute and just where we live and where he works. In fact, a lot of people we spoke to say they're trying to drive less. We don't do a lot of driving.

And when we do drive, we try to combine things. For example, if we have doctor's appointments, which we do regularly, you know, we try to make sure that they get combined. That's Robert Hart. He's a retired veterinarian from Ormond Beach in Florida. The majority of his family's income comes from his Social Security benefits, which stay the same despite the rising prices. So Hart tries to reduce costs wherever he can. When I go grocery shopping, I certainly look for things that are on sale. Very seldom do we buy any meat. We are turning much more vegetarian.

We make our own bread, make our own pasta. And we no longer go out at all. We haven't been out to a restaurant probably in a year. And we don't go to the cinema. In fact, we don't go out. We couldn't afford to. Consider this. Inflation is the highest it's been in four decades.

The Federal Reserve has moved aggressively, raising interest rates three times already this year. The idea is that making borrowing more expensive will slow demand and cool the economy. The Fed is expected to raise interest rates again this week. The question is, will it be enough to curb inflation? From NPR, I'm Juana Summers. It's Monday, July 25th. This message comes from WISE, the app for doing things in other currencies. Send, spend, or receive money internationally, and always get the real-time mid-market exchange rate with no hidden fees. Download the WISE app today, or visit WISE.com. T's and C's apply.

It's Consider This from NPR. The Biden administration is facing a tough task, bringing inflation under control while trying not to crash the economy. My plan is to address inflation. Starts with a simple proposition. Respect the Fed. We at the Fed understand the hardship that high inflation is causing. We're strongly committed to bringing inflation back down, and we're moving expeditiously to do so. That's President Biden and Federal Reserve Board Chairman Jerome Powell. And what Powell means when he says they're moving expeditiously is that they're raising interest rates. We brought in two NPR correspondents to explain the stakes and talk about all of the things that are roiling the economy right now.

Hi, Scott. Hi, David. Good to be with you. Hey, Juana. Inflation is raging right now, and I have to imagine that most Americans have never experienced anything like this in their lifetime before. Scott, is it changing consumer behavior? We are starting to see people change their behavior a little bit, and that's a change from what we were seeing earlier in the pandemic. You know, when the price of gas hit $5 a gallon last month, people actually bought less gasoline. And that's unusual. Ordinarily, people will complain when the price of gas goes up, but they typically pay whatever it costs to fill up their tank. It's evident now there is a breaking point, and it seems to be somewhere around $5 a gallon. We're also seeing changes in what people spend at the supermarket.

Early in the pandemic, when people were having to eat all their meals at home, some folks actually splurged and traded up to more expensive brands to replicate the restaurant experience they weren't having. Now they're going in the opposite direction. Spending at the supermarket is still climbing, but people are walking out with less food in their shopping carts. In some cases, they are trading down to generic store brands or shopping at cheaper outlets. This isn't true throughout the economy, though. Airline ticket prices are still climbing, and yet people are buying more airline tickets. Spending at restaurants also continues to outpace restaurant prices. But as the cost of things like food and energy and rent keeps climbing,

people are having to adjust their behavior. Another thing that a lot of people are feeling right now, David, is that their investment portfolios are just getting hammered. Is there a connection between inflation and all of the stock market crashes that we've seen this year? We have had so much volatility. So you're picking on something I think a lot of people have noticed, which is that markets have been really tumbling. There have been days when we've seen these kind of thousand point swings.

That's really radical and that's tough to stomach, even if you're somebody who's invested for the long haul. If you're a retiree, this is a difficult time because portfolios are getting crushed and you know that you need that fixed income to live. And it comes from those portfolios. It's also a really tough time for people who are new to investing, who might have downloaded an app like Robinhood at the beginning of the pandemic and invested for the first time. This has been a really rude awakening. And there's a connection here to what Scott knows so well covering economics. And that's just the role that the Fed is playing and how markets are reacting to it. I mean, there's this connection between inflation and these market crashes because the Fed is hiking interest rates aggressively to bring down inflation. What it's doing basically

is it's raising borrowing costs for people, for businesses as well. And what the Fed hopes will happen is that's going to slow down spending and bring down prices. So to use a kind of tired metaphor here, the Fed is pumping the brakes on the economy in a way that we really haven't seen for decades. And what that means is this era of cheap money that we'd all gotten used to is over. And that's made it a particularly volatile and difficult year for Wall Street so far. David, what do you mean when you say cheap money? What is that? So for a really long time, the Fed had pushed interest rates down. They were near zero. And that made loans really affordable, made it easy to get loans, made it easy to bet on the future. And you look at sort of where you

would have an opportunity to make money. You couldn't make money really in a savings account because interest rates were so low. So stocks were a place where that was happening. And people had an inclination or a willingness to make bets on the future of companies, particularly high growth companies or tech companies. That's kind of dissipated now as these interest rates have gone up, and we've seen those tech companies getting really hard hit. Netflix is down more than 60% this year, and Meta, Facebook's parent company, is down more than 45%. Scott was talking about energy just a little while ago.

If you look kind of broadly at the stock market, it really is only energy companies that have done well, in large part because those energy prices have gone up. We're paying more at the pump. So investors were comfortable taking a chance on tech companies, other high-growth companies. When interest rates were low, now there just isn't much of an appetite for investments that are seen as speculative. One thing I want to talk about that I've been thinking a lot about, certainly, is cryptocurrency. David, when you talked about speculative assets, that was the first thing that came to my mind. Yeah. I mean, cryptocurrencies really grew in value last year in kind of a crazy way.

It coincided with this big marketing blitz that companies made. They were spending tens of millions of dollars on ads kind of leading up to the Super Bowl. You remember that? And we saw Bitcoin really go up in value. That kind of happened at the beginning of November of last year. Since then, it's really dropped. There's been this huge steep sell-off. And we were talking about how people got into investing for the first time with Robinhood app. A lot of people got into investing in crypto for the first time, and they saw it as a volatile asset, but the volatility was really only in

one direction. It just seemed like it kept going up and up and up. And now there's been this really big crater. For a long time, Bitcoin's backers said it was going to be an inflation hedge, that if we were to see high inflation, crypto would protect you. It would do well in a high inflation environment in the same kind of way that people look to gold as a safe haven. It's something that's going to protect you. That hasn't been the case. We've seen it kind of grow into being a speculative asset like a tech stock. And so there are a lot of people who are really hurting as a result. And I think it's kind of emblematic of where Wall Street is right now. It's more conservatism prevailing on Wall Street. Companies are being cautious. They're waiting to see what happens with the economy. I think there's been 80% fewer companies that have

gone public making their shares available to trade on the stock market. They've decided to hit pause. They're waiting out this uncertainty. And I think that that's a major takeaway from this moment. People don't know what's going to happen. That makes them a bit nervous. And I think there's this bottom line. There have been a lot of bubbles that have been bursting, and crypto is certainly one of them. The other place you really see the impact of those rising borrowing costs is in the housing market. Mortgage rates are about twice what they were this time last year. As a result, a typical monthly house payment has jumped nearly $750 this year. That's putting houses out of reach for a lot of would-be buyers. And so builders are building fewer homes.

Sales of existing homes are down. The average selling price has still continued to climb across the country. But in some of the hottest markets, you are starting to see price cuts. And it will take some time for these housing changes to show up in the inflation data, but it will happen eventually. Scott, how have these dramatic inflation numbers that we have all been watching and talking about affected the Fed's actions? Well, you said it, Wanda. They are dramatic. Inflation topped 9% in June. If you're under 40, you've never seen prices climbing this fast. So the Fed is trying to, as David says, pump the brakes. It does that

by making it more expensive for people to borrow money. It started boosting interest rates in March, and those rate hikes have actually accelerated since then. We expect the central bank to raise rates by another three quarters of a percentage point later this week. That would match its increase back in June. What do we expect rates to go from here? Well, they're probably going to go higher, but the pace of those increases is still up in the air. The Fed is kind of taking it month by month as it sees how this all plays out. I will say that we have gotten a little bit of reassuring news since the June meeting when the Fed was really nervous that people's expectations for long-term inflation might start to come unglued. That's worrisome because if people think prices are just going to keep climbing at a rapid rate,

it can feed into the kind of wage price spiral we saw back in the 1970s. Since then, though, we've seen some survey data showing that most people, even though they're really worried about high inflation this year, they think inflation is going to come down three to five years out. So they still believe the Fed's going to get control over this, even if they are worried that the higher interest rates are going to cause a lot of pain along the way. That's NPR's Chief Economics Correspondent Scott Horsley and Business Correspondent David Gurra. It's Consider This from NPR. I'm Juana Somers.