Understanding the Urgency of Rate Hikes

In order to stabilize inflation, immediate action is essential, even if it may trigger a worldwide recession.

Recent inflation statistics reveal a concerning trend, indicating that inflation is on the rise. This situation compels the Federal Reserve to maintain its aggressive stance on interest rate hikes. Although there was hope that the Fed's earlier increases had sufficiently curbed inflation during the summer months, the latest figures suggest otherwise.

While the Federal Reserve assesses inflation through the Personal Consumption Expenditure (PCE) index, the Consumer Price Index (CPI) serves as a more accurate reflection of consumer inflation. In July, the CPI remained unchanged, and in August, it only rose by 0.1%. This initially gave the impression that inflation was receding.

However, the CPI saw a 0.4% increase in September, and projections indicate that monthly CPI could rise by 1% or more in the upcoming months. This trajectory suggests that by year-end, annual inflation could approach double-digit percentages.

A significant factor in the fluctuating monthly CPI is energy prices, which represent nearly a third of the CPI. A decline in demand, primarily due to a slowdown in global economic activity, led to a decrease in energy prices—falling approximately 5% in July, more than 10% in August, and nearly another 5% in September.

Despite the CPI's positive performance, prices for all other categories, excluding energy, have been rising sharply. In fact, when food and energy are excluded, the core annual inflation rate stood at 6.6% in September. With rising energy costs anticipated in October and OPEC's plans to cut production amid lower demand expectations, substantial increases in energy prices are likely in the months to come.

Food prices are also on the rise due to higher expenses for fertilizer, labor, and diesel fuel, prompting domestic farmers to seek increased prices for this year's yield. Additionally, the conflict in Russia and Ukraine, which produces 25% of the world's wheat supply, has further constrained supply, driving prices upward.

Consequently, the combination of a 6.6% core inflation rate and escalating food and energy prices suggests that annual CPI will continue to rise.

The Federal Reserve's monetary policies over the past year have been criticized as shockingly irresponsible, significantly contributing to the inflationary crisis. For much of 2021, Fed officials overlooked their primary goal: maintaining price stability.

In March of this year, the Fed concluded its bond-buying program and began to elevate interest rates. By June, it became evident that the previously low interest rates were inadequate for combating inflation, prompting a 75 basis point increase—the largest since 1994.

As inflation surged to 9% by then, more assertive rate hikes became essential. The Fed raised rates by another 75 basis points in July and again in September, with the expectation that these measures would curb inflation. Unfortunately, this has not proven sufficient.

Thus, the Fed is likely to implement at least another 75 basis point increase in November, followed by a similar hike in December. This still may not suffice, as real interest rates may need to exceed inflation rates for inflation to decline effectively.

If the Fed relaxes its policies due to fears that rapid rate hikes could precipitate a global recession, inflation is likely to worsen. It is critical to bring inflation down to manageable levels promptly; delaying this effort only complicates the situation. A gentle approach could result in entrenched inflation alongside a potential wage-price spiral that is already emerging and notoriously difficult to eradicate.

Labor organizations and independent workers are increasingly demanding higher wages to keep pace with inflation. Even Social Security beneficiaries are set to receive an 8.7% increase in benefits next year. This figure may lead workers to push for comparable raises, which in turn could elevate labor costs for businesses, perpetuating inflation.

Inflation is akin to a cancer that, if left unaddressed, can infect the entire economy and become deeply rooted. Its repercussions are particularly detrimental, often resulting in a diminished standard of living, predominantly affecting lower-income workers and retirees.

Current data indicates that the Federal Reserve must intensify its interest rate hikes, even if such actions lead to a global recession.

The first video titled "Where To Invest After The Fed's 50 Basis Point Rate Cut | Will Rates Go Back To Zero?" discusses potential investment strategies in light of recent Fed actions and explores the implications of future interest rate adjustments.

The second video, "How March's CPI Report Could Impact the Fed's Interest Rate Policy," provides insights into how fluctuations in the CPI could influence the Fed's future monetary policy decisions.