University of Dayton Economist: Inflation is something we probably have to live with for a while
Earlier this week, WYSO’s Jerry Kenney spoke with a local financial adviserto find out how the Federal Reserve’s big interest rate hike could affect investors and retirees. Today he speaks with University of Dayton Assistant Economics Professor Jia Wang about the rate hike’s impact on consumers.
Jia Wang: This rate increase is mainly to help to slow down inflation, as the Federal Reserve has been doing in the previous couple of meetings. But, from reading, following the news, I notice it's even a larger increase than expected because inflation has not slowed down and that consumers already felt the hardship and the cost of rising prices. So by raising the interest rate, which we call the benchmark rate, federal funds rate, it's more expensive for commercial banks to borrow money from each other in the short term. By raising this borrowing costs that make commercial banks less willing to lend to consumers, right? And, at the same time, this benchmark interest rate moves in the same direction as all the other interest rates.
So higher benchmark rate, that means higher interest rate on your credit card, that mortgage when you buy own home, and also auto loans, so on and so forth. So, anything you buy that involves a debt, that involves interest rate is going to be higher now. So higher risk, meaning it's more expensive to borrow. So, that would discourage consumers from spending money as much. So, overall, this would help to lower the demand from the consumers. So, we are likely to see at some point lower demand for housing, lower demand for new cars, probably less spending on big ticket items like furniture or so on and so forth.
Since I think most people rely on borrowing to purchase those things. If you don't rely on borrowing to purchase those things, then this wouldn't affect you as much. And overall, with this higher rate, this may incentivize some consumers to try to pay off their credit card debt sooner than later because from the news, the rate is expected to rise again and continually throughout the year. So, definitely in that aspect, but overall, with lower demand, hopefully this can bring down or at least slow down inflation or above inflation. There's a variety of factors contributing to that. We can, the Federal Reserve can try to slow down the demand side, but there are supply side factors. There is disruption in production since the pandemic, there are supply chain issues, right? And recently we have the war going on which affects the gasoline prices. So those are kind of outside of the control Federal Reserve.
Jerry Kenney: So, with the challenges now to borrowing money and incurring debt, people will rely, it sounds like, on perhaps funds that they already have, savings, to get things done.
Wang: Yeah, definitely. So, I would say, well, with higher interest rate and we're talking a lot about on spending money, at the same time the rate on the savings count should also increase. But obviously inflation rates are so high, it's not going to counter as much. So, this may encourage saving, if the consumer is able to and is going to incentivize them to pull back spending. Maybe I don't buy that couch yet. Maybe, let's hold off purchasing the home for another year. So, overall, yeah, that's what I would expect.
Kenney: Well, what else do you think we might need to know from a consumer perspective about the rising interest rates, continuing inflation? How does how does all of this affect any population?
Wang: So, I do think one thing is, despite the Federal Reserve is committed to bring down, slowing down inflation. It takes time for people to adjust to behavior. It takes more time for [before] it's going to be reflected at a macro level. So, we may not see inflation rate coming down immediately. It's not like snapping the fingers [and] it's lower now. So, I think we would expect some delaying response, and a little bit surprisingly, like the previous rate increases actually, inflation didn't come down at all. So, I think especially with the supply side factors right away, I don't know how that's going to evolve in the near term. I would say inflation is definitely something we probably have to live with for a while. Hopefully, that doesn't get too terrible. The same time, some people may be concerned about the Federal Reserve being too aggressive. If your risk to get too high, it's possible you're pushing the economy into a recession, but we don't know yet.
Kenney: Jia Wang, I really do appreciate it.
Wang: Oh, thank you. You're very welcome. It's my pleasure.
Wang also noted in this interview that consumers should consider paying off any credit cards and other debt with variable interest rates if they can, or try moving those accounts using a zero interest transfer.