Inflation Down, Fed Will Pivot Soon: Wharton’s Siegel
Probably due to pandemic-related stimulus programs and a pandemic-related supply chain issues, inflation began increasing worldwide in 2021 and hasn’t’ let up since. No doubt Americans are are freaked out: learning that a thing you always buy is suddenly significantly more expensive is a jarring experience. But there is an upside to inflation, especially if you’re in debt.
You only have to pay back the number of dollars you borrowed, so if the value of each dollar decreases, your debt shrinks. It’s bad for your 401K, but great for your home or student loans. A couple weeks of Venezuelan style inflation and you could pay off your credit cards for the cost of a ham sandwich.
Of course, a 1,500% inflation rate would mean you had bigger problems than paying back some money you borrowed, but our current inflation is nowhere close at “only” 8%, and there’s reason to think that number has already peaked (though it will likely be a while before prices begin dropping).
Inflation is a result of too much money in the system, and when we want to lower inflation, the Federal Reserve Bank taps on the economy’s brakes by making money more expensive to borrow. The Fed has raised interest rates by a full three percentage points in the last six months. They’re relatively delicate on the pedal because raising interest rates too much, too fast can lead to recession, so we haven’t see dramatic effects yet, but according to some economists, including Paul Krugman, that’s only because of the lag between policy being enacted and its effects being realized. So more reasonable economic days are ahead. Maybe.
