Investors expect interest rates to rise by 0.75 percentage points

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US inflation accelerated to an annual rate of 8.6% in May, its fastest pace in 41 years. Consumers are seeing prices rise sharply for a variety of goods and services as strong demand is met with ongoing supply shortages.

Inflation is one of the most frustrating issues facing economists and government policymakers, and it’s a factor that increases the risk of recession in the United States. The causes are multiple and the tools usually deployed to control price pressures can, in certain scenarios, plunge the economy into a recession.

Here’s what you need to know:

What is Inflation? Inflation reflects the general rise in prices or fall in the value of money. It usually results from too much demand for too few limited goods or services, leading to price hikes. Inflated prices do not necessarily harm the economy as a whole, and only consumers who shop experience the increase.

For example, the prices of new and used cars have risen sharply due to the shortage of vehicles due to a lack of components such as semiconductors. Rising auto prices don’t necessarily affect you unless you want to buy a vehicle.

Higher prices in one sector do not necessarily lead to general inflation throughout the economy. But price increases across a range of categories will weaken consumers’ purchasing power.

What causes inflation? The current inflation spurt has several causes, many of which are related to the pandemic. On the one hand, consumers have taken advantage of savings from government stimulus programs and reduced spending on services due to restrictions on businesses, causing them to turn on the tap for goods that are in short supply.

Supply chain disruptions also persisted in the global economy, with Russia’s invasion of Ukraine and China’s Covid-19 cases adding further pressures. Energy prices, including record gasoline prices, rose sharply. Truckers, seaports and warehouses are all in short supply, leading to costly delays and increased freight shipping rates.

Fewer workers are in the workforce, encouraging those who are working to demand raises. And low Federal Reserve interest rates have made borrowing cheaper, making big purchases more attractive. The Fed is now moving quickly to make borrowing more expensive, using the central bank’s primary tool of raising rates. These and other factors drive up costs.

The added costs, at every stage from production to sale, are driving price increases for consumers, with some companies seizing a rare opportunity to raise prices.

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