Will December’s Positive Inflation Report Put an End to Sharp Interest Rate Increases?

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Consumers can get some relief from borrowing.


the main points

  • The Federal Reserve has been raising interest rates in an effort to calm inflation.
  • The consumer price index fell in December, which could slow rate hikes.
  • This may lead to lower consumer interest rates.

For almost the entire year of 2022, Inflation wreaked havoc on consumers. That forced many people to go to extremes like raiding Savings accounts and accumulating credit card balances just to cover their basic expenses, such as food, health care, and housing.

the Federal ReserveMeanwhile, he was doing his best to address the issue of inflation. In 2022, the central bank implemented a series of sharp interest rate increases to raise the cost of borrowing.

The logic here is that if borrowing becomes too expensive for consumers, they will start to cut back on spending. This could help narrow the gap between supply and demand that is causing inflation to remain at such exponentially high levels.

Of course, exorbitant borrowing is a burden on consumers at a time when the cost of living is also rising. But the just-released December Consumer Price Index (CPI) had some positive news on the inflation front. It can lead to consumer relief in multiple ways.

Will the Fed start to slow down in raising interest rates?

In December, the CPI rose 6.5% year-on-year. Historically speaking, this is a significant increase. But it is far less than the 7.1% annual increase recorded in November. It is also significantly lower than the June 2022 reading, at which inflation peaked at 9.1%.

If the Fed is happy with the December CPI reading, it could be easy to raise interest rates for the foreseeable future. So consumers may feel relief in the form of not only lower costs of living, but also a less drastic increase in borrowing costs.

But the “if” mentioned above is great. The Fed does not seem inclined to back down in its fight to bring inflation down to more moderate levels. In fact, in late November of 2022, Federal Reserve Chairman Jerome Powell said, “For wage growth to be sustainable, it needs to be consistent with an inflation rate of 2%.”

Obviously, 6.5% inflation is a far cry from 9.1%. But it’s also a far cry from 2%. In fact, even if inflation continues to cool off nicely month after month, we may not get to 2% inflation anytime in 2023. So all said, while December CPI data may prompt the Fed to slow down High interest rates, it is not guaranteed.

Consumers should borrow with caution

Even if the Fed returns to raise interest rates, the reality is that right now, it’s expensive to borrow money in almost every form, be it personal loanOr a car loan or credit card balance. So consumers should do their best to borrow carefully and ensure that they can manage any debt payments they lock themselves in.

Of course, avoiding debt altogether is ideal right now, especially with so many recession warnings looming on the horizon. But if the Fed slows down as interest rates rise, we may succeed in avoiding the terrible Recession Many experts warn about it.

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