Inflation Versus Interest Rates

[Fred Weiss]

Can someone please explain to me how raising interest rates is an acceptable way to stifle inflation. My home mortgage is an adjustable rate and is up several hundred dollars a month. Who decided that this is a preferable way to hold down the price of groceries?

 

[Boudica]

My mortgage is fixed, not seeing that problem at the moment, but I've often wondered how that's supposed to work too. Also I don't get why the drama news cycle affects my 401k and my Roth IRA. It's perplexing.

 

[Texas_Signmaker]

Raising the fed rates has to do with the banks more than the consumer.

On the consumer side.. higher interest rates reduces the demand for loans, thus lowering demand for whatever product that loan was for. Higher mortgage rates means a less demand for homes which means prices cool. Lowering prices means lower inflation. You had 12 years to get that rate fixed... Now it's too late.

Inflation results from adding to the money supply. The government added huge amounts to the money supply at a time when it couldn't be spent. People then tried to spend it and demand outstripped supply at the same time supply was having problems. The fed kept QE which is a form of "printing money" right into the beginning of this year, which many economist said was way to long... and I agree. Now they are tighting policy and "buying back" the money. The "printing" and buying back of money is separate from their action of raising rates, but is very important.

The Fed funds rate is the "cost of money" between the banks and ultimatly the consumer. Raising the "cost of money" reduces demand.

 

[Johnny Best]

With all that money flowing in from your clip art business plus the money from selling Signs101, you could just pay off that mortgage. You just got a 8% rate increase in Social Security, come on man! Vote Republican next time.
Your like Uncle Scrooge diving in your gold down in the basement and complaining about losing a nickel.

 

[Notarealsignguy]

Why would you have an ARM when fixed rates were pretty much the lowest they will ever be.

 

[victor bogdanov]

Can someone please explain to me how raising interest rates is an acceptable way to stifle inflation.

The same way it was acceptable to print the money in the first place. Government is always "helping" fix the problems they caused in the first place and average folks pay the price both ways. You'll have to pay a little more so that more money can be printed and sent overseas

 

[White Haus]

Why would you have an ARM when fixed rates were pretty much the lowest they will ever be.

I guess before they started bumping interest rates monthly they would sometimes work in your favor. Personally I've always done 5 yr fixed and luckily I got in at 2.09% last December before things got ridiculous. Pretty sure best rate you'll get around here for 5yr fixed is well above 5% now. Hopefully it settles down before I have to renew.

I'm no economics major but I think the US/Canada are nuts for what they're doing. I've yet to see an argument that makes sense for all these rate hikes. (Until I read Tex's explanation.....I guess it almost makes sense)

 

[GAC05]

I'm 2 payments away from paying off my mortgage. Once that's done I am going to kick back and play Call of Duty Modern Welfare for the rest of my days.

 

[victor bogdanov]

Who decided that this is a preferable way to hold down the price of groceries?

The same people that told you to stay home for 2 weeks to flatten the curve

 

[victor bogdanov]

I'm 2 payments away from paying off my mortgage. Once that's done I am going to kick back and play Call of Duty Modern Welfare for the rest of my days.

Don't forget to pay your property taxes or that house gets auctioned off. Can't own property free and clear

 

[GAC05]

Don't forget to pay your property taxes or that house gets auctioned off. Can't own property free and clear

That will be up to my descendants, I think I have paid enough.

 

[Notarealsignguy]

Tightening the money supply to lower demand is how you control inflation and that's done by raising interest rates. I don't get the confusion?
There was Lots of complaining that something needs to be done about inflation but when something is done, everyone complains about that. This is definitely not something that can exist both ways.

 

[victor bogdanov]

Tightening the money supply to lower demand is how you control inflation and that's done by raising interest rates. I don't get the confusion?

Step 1 should be stop printing money and reduce governments spending, instead 370 billion of the "inflation reduction act" will be used for "climate change"

 

[ikarasu]

You guys have long mortgage periods don't you?

Over here we have to renew every 5 years. For the past 10 years I was on fixed, about 2 years ago I decided to go variable... Lucky me.

I was paying $800 a month and now I'm at $1,300 a month.. so $500 increase.

In a way I'm glad I'm on variable, all of those fixed rate people laughing at us.... Well I would rather $100 increase every few months, a lot of these fixed rate people will have to renew their terms in a year or two and they will be shocked when their price jumps to double... At least on variable it's incremental.

Either way it sucks in a lot of people are going to be losing their homes, my mortgage is only for $200,000 since I made a huge down payment, most other people in my area are at 7 to 800,000 mortgages, I can't imagine how much their bill is going up every single month

 

[GAC05]

Tightening the money supply to lower demand is how you control inflation and that's done by raising interest rates. I don't get the confusion?
There was Lots of complaining that something needs to be done about inflation but when something is done, everyone complains about that. This is definitely not something that can exist both ways.

Tightening the belt around my waist has done nothing to control the inflation of my midsection. I'm going to have to think of a better strategy.

 

[Notarealsignguy]

I tell my wife to stop washing in warm water because she is shrinking all of my clothes. It couldnt be anything but that

 

[Boudica]

In 18 years we've refinanced our house once. We are about 2 years away from having it paid off. I'm not really worried about interest rates, I've just never gotten how it works... Regarding inflation.

 

[Stacey K]

I'm glad I have a fixed rate on my shop and my house.

In 2021 my shop taxes went up $200 per month to cover the city putting in new water lines and sidewalk. Then my house taxes went up $100month to cover new sidewalks. THEN this summer I got hit with new lead latterals at my house for another $1500 - good news is they got a grant from the state and that was covered. I had almost $10,000 in one year in city repairs between the two properties. At my shop theres a hill that is by the sidewalk and I had it landscaped nicely but they wanted me to install a 4' high x 80' retaining wall on top of everything else! I fought it and they paid for it. Since the interest rate is only 1% I had them add it to my taxes vs. paying it outright.

 

[Bobby H]

It does seem pretty shocking that rates for a 30 year fixed mortgage surpassed 7% for the first time in 20 years. I wonder how many people putting those news headlines on blast remember 1981 when 30 year mortgage rates went as high as 18.6%.

To answer the original question, how raising interest rates stifles inflation: it's about supply and demand. When too many people want to buy something in limited supply, such as a place to live, prices rise. It's one thing if prices rise on a "discretionary" item not essential for survival. When the basic cost of living rises well above average wage gains then that's a problem. A whole lot of buying is done with borrowed money. Making it more expensive to borrow money it brings down demand and slows down price hikes. Or even reverses the price hikes in some cases.

The Federal Reserve has only a limited number of tools to combat inflation, such as changing its lending rates. The policy has worked many times in the past, including the late 1970's to early 1980's period when the Federal Reserve had to go completely nuclear on interest rates. Inflation was getting out of control in the late 1970's and threatening to go into a destructive spiral where the US Dollar would just get de-valued.

The situation today is far more complicated. It's probably going to take more than just interest rate hikes to calm the turmoil in the economy in the short term. There are problems that are deep rooted and structural that threaten to turn into stubborn, long term problems. Cost structures in housing, health care, day care and some other essentials are not sustainable. Certain job sectors are experiencing severe labor shortages in part because those jobs don't pay a survivable wage at all or at least in that specific location of the country. Wages have been rising in some job categories, but overall not as fast as rates of inflation on food, fuel and rents.

Cranking up interest rates often comes with the side-effect of sparking a recession and job losses. In past growth vs recession cycles job losses were usually recovered and then some in following periods of growth. For much of the 1980's the American economy boomed following the deep recession at the end of the 1970's.

 

[rjssigns]

I'm a simpleton when it comes to this stuff. But there's an easy way to fix at least part of the problem and that is producing our own oil and gas.
Why? Because EVERYTHING is transported with fuel burning vehicles. Truckers just don't absorb the cost of 5 dollar fuel and say oh well.

Wasn't that long ago I remember buying gas at Costco for 99 cents a gallon. Less than two years ago it was well over a dollar less.

You can't issue an edict of no more drilling, no new oil leases, no renewing of energy leases etc.... without having a solid transition plan in place.
Instead that is just what happened and we the peons are left to suffer with the consequences.