Where inflation may linger
Let’s suppose, for a moment, that the Federal Reserve succeeds in its goal of getting inflation under control.
Does that mean prices for all of the different things we buy will fall back to — or close to — where they were before the current surge?
Well, it depends on what you’re buying. Inflation will probably persist for the average household’s biggest expense: “The shelter category,” said Greg McBride, chief financial analyst at Bankrate.
McBride said this is true whether you’re a homeowner shelling out for property insurance — “you could get a pretty notable increase that puts a squeeze on the budget” — or a renter.
“If you’re in a market where home prices are up 20% or 25%, you may get sticker shock when that lease renewal comes through,” McBride said.
He doesn’t expect that to change for at least another year, no matter what the Fed does next.
But prices for other things we need may respond more quickly because of how the Fed tries to control inflation.
By raising interest rates, the cost of borrowing goes up for consumers, according to Betsey Stevenson, who teaches public policy and economics at the University of Michigan.
“And so the idea is to just lower demand. As people buy less, that will slow the rate at which prices increase,” she said.
And prices tend to adjust first in two important categories, said Alan Detmeister, an economist with UBS.
“Gasoline prices and food prices tend to respond very dramatically to changes in demand. So if the economy slows pretty dramatically, where you’re likely to see it first is in gasoline prices falling,” he said.
The Fed can try to influence that demand, but it has no control over the other thing driving prices up: the supply chain problems that have plagued the economy since the pandemic started.
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
