Like many Americans, you may be wondering just what in the world is going on at the gas pump, the grocery store, and the car lot – all places where inflation has been evident. Right now we're seeing a 40-year high inflation rate that's really hitting Americans in the pocketbook. The Fed is raising interest rates to help deflate this situation, but how might this affect you in 2022? Let's take a look.
Interest Rates and Their Impact
How do interest rates and inflation impact you? The consumer price index (CPI) is a measure of the change in prices over time. In other words, how much consumers spend on average for a number of goods and services like food, energy, and gasoline. According to The New York Times, the CPI rose by 7.9% through February. This is the fastest growth inflation has seen since 1982.
To you, this means you see prices going up on everyday items, and you see them going up quickly. Demand for these items is up impacted by a tightening supply chain, and world events. But prices stay high when people are willing to pay them.
This is where the Federal Reserve comes in. Interest rate hikes battle accelerated inflation, and the Federal Reserve made its first move toward slowing inflation with a rate hike on March 16. The quarter-percentage-point hike is the first uptick in the federal rate since December of 2018. This now puts the benchmark interest rate range at 0.25% to 0.50%. The Fed is proceeding with caution in light of recent world events but has penciled-in rate hikes at each of their next six meetings this year. Borrowers could immediately begin to see these increases when they're applying for consumer loans.
When the Federal benchmark rate goes up, it means the rate at which banks lend each other money goes up and everyone will see an increase in the interest rate you pay on things like mortgages and auto loans. With borrowing more expensive, consumers and businesses slow investments which help to slow the economy. This drops demand, and prices follow. It could also help to ease the supply chain issues that are helping keep prices high.
Increasing interest rates are set to slow economic growth, and bring down inflation, without causing a recession. According to CNBC News, Federal Reserve Chair Jerome Powell said at a press conference after the meeting "The committee is determined to take the measures necessary to restore price stability. The U.S. economy is very strong and well-positioned to handle tighter monetary policy."
Interest Rate Hikes and Car Buying
Will an interest rate hike affect you? This increase is likely to impact consumers when it comes to auto loans, but how much this change is truly felt in the automotive market is yet to be seen. If you're already paying an elevated interest rate due to your situation, you may not feel the pinch as much as others. And, the impact may take a little time to be felt.
For car buyers, this means being diligent about shopping for the best deals. Make sure you know where your credit stands, and what types of interest rates you're likely to qualify for. Remember with tight inventory also comes higher prices, so you may have to shop several dealers to find the best offer for your situation. If you keep your search to a two-week window, called rate shopping, all the inquiries you make for the same type of loan only count against your credit score once, instead of having multiple credit pulls hit your reports over time.
How High Will Interest Rates Go?
The Fed has begun their increase in interest rates and is set to make another increase this week when they meet. Right now it seems the Federal Reserve is set to make bigger moves in May and June, before scaling back later in the year. Predictions say the Fed will increase the benchmark rate by 50 basis points, which is 0.5%. Another half percent hike is set for June.
Some on the committee have pushed for bigger increases to the benchmark rate, but the steps taken so far by the federal reserve seem to be helping to somewhat slow the hot inflation we're seeing. With the current increase to come in May, benchmark interest rates will sit around 0.5% to 1%. The current prediction is that base interest rates are set to climb to between 3% and 3.25% by the end of the year. Experts claim this should be plenty to curb the current rapid inflation we're seeing this year.
As the Fed increases in interest rate begin to impact the market, we'll know more about the direct impact on car buyers, and we'll keep you posted on how the rising federal interest rate could impact you. Look for the latest updates and numbers here when they become available.