The Consumer Price Index. Conflict. Dire Straits.

Are There Other Ways To Slow Inflation? Things Are Bubbling Up. Mark Knopfler.

  • It is time to pay attention, and I am not referring to Tuesday’s midterm elections. What I am referring to is the various economic news and information we are unfortunately consuming. Turn on any news program, whether it be on your television, radio, or social media, and the words inflation, the Federal Reserve, and the infamous federal funds rate are mentioned and discussed with incessant and non-stop blabber.

I mentioned some economic news last week regarding the Fed’s efforts to curb inflation. I questioned the rising federal funds rate, which is the interest rate that banks charge each other to borrow or lend excess reserves overnight. The Fed’s objective with raising the federal funds rate is to curb the consumption of goods, and by all accounts their actions to slow down consumption with interest rate management is working. Unfortunately, the rise in rates is not without negative vibes within many sectors including the housing and automobile business.

I wanted to level set why all of this federal rate activity has been instituted, and the word of the day is inflation. Inflation is defined as the sustained increase of the price level (i.e.: just compare food prices at your grocery store since the beginning of the year). When we hear “rate of inflation” it refers to the change in price levels over a period of time. When the price levels rise, our currency buys fewer goods and services – so in layman’s terms, inflation reflects a reduction in our purchasing power. The result of the inflation we have experienced is that we are forced to spend more and our cost-of-living increases over time. The cause and effect of higher interest rates has a trickle-down effect to us as consumers, as we theoretically must slow down our spending, which in turn the Fed hopes will curb inflation.

A high rate of consumption by us drives demand for goods and services which in essence drives up inflation. Last week I questioned the Fed’s rate hike tactics and questioned if there were other ways inflation could be slowed. The Fed raised the federal funds rate again last week, another 0.75 percentage points as part of its ongoing effort to fight inflation. This sums up the situation we find ourselves in: “A fourth consecutive rate hike of 0.75 percent – after going 28 years without one that large – speaks to the urgency of the Fed’s task,” says Greg McBride, CFA, Bankrate chief financial analyst. “They were late to acknowledge inflation, late to wind down stimulus, late to start raising rates, and late to ramp up rate hikes in a meaningful way. They’re still playing catch-up against inflation that continues to run near 40-year highs.”

What does all of this mean for us? Borrowing money. As mentioned last week, rates on 30-year fixed-rate mortgages have climbed above 7 percent for the first time since 2008. Mortgage demand from homebuyers is half of what it was one year ago. Pending home sales have plunged 31% from a year ago to their lowest level since 2010. Car loans: Forecasters lowered their expectations for 2022 U.S. auto sales yet again to just 13.7 million new cars and trucks, down about 9% vs. 15 million in 2021, and down almost 20% vs. 17.1 million, in pre-COVID 2019.

Are there other ways to curb inflation other than systemic Fed rate hikes? Terms like supply-side economics, Keynesian theory, trickle-down effect, and Reaganomics come to mind but I do not have the bandwidth to analyze those tactics and policies. The good news is that there are many of you who do have the financial and economic background to do so, and your comments are welcome. Richie, you are one of them, so please chime in.

  • Did you win the $1.6 billion Powerball jackpot? Do tell.

  • Has it always been this way, or does it seem like many parts of our planet are bubbling up and tense with conflict? North Korea firing missiles over South Korea, Pakistan on the verge of civil war, Iran sending drones to Russia, Russia and Putin in Ukraine, Myanmar’s civil war, Haiti’s continued instability, and many others including Sudan’s political uprising amid drought and conflict. The ability of media coverage to span the globe and create and distribute content on-demand has obviously alerted all of us to worldwide issues, but it does seem like global conflicts are on the continued rise.

  • Twenty weeks. I cannot wait for March 12, 2023.

They have always been a top-five band for me. Formed in 1977, this British rock band brought us a combination of sound, including folk, blues, and country. Mark Knopfler’s guitar skills are renowned, with his ability to combine a smooth style with “picking” which is often aligned with blues and country. Most of us remember their hit single, “Sultans of Swing” but the video below shows off Knopfler’s abilities at his best. The band: Dire Straits.

Mark Knopfler and Dire Straits in 1988.

Adios, pay if forward, be safe, and have a Funday Sunday!

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