Are the Fed's Rate Hikes Working to Cool Inflation? The Data Seems to Say No

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  • The Federal Reserve has been hiking up interest rates in an effort to slow inflation down.
  • Recent data indicates that its tactics aren't working.
  • Inflation was up again in the latest report, so the Fed may need to continue taking drastic action.

We can't seem to shake inflation -- and that's not a good thing.

If you're someone who's carrying a credit card balance, you may have noticed that the interest rate on your debt recently went up. And if you've been looking to apply for a mortgage or personal loan, you may have gotten a bit of a shock upon seeing how high interest rates have gotten.

There's a reason it's become so expensive to borrow. The Federal Reserve is on a mission to slow down the pace of inflation, which has been wreaking havoc on consumers since last year. In fact, over the past several months, the Fed has aggressively raised interest rates in an effort to encourage consumers to cut back on spending. If spending declines, it could help narrow the gap between supply and demand that caused inflation to soar in the first place. 

But the latest set of inflation data shows that the Fed's interest rate hikes may not be doing their intended job. And the Fed may need to get even more aggressive if it wants to bring inflation to a halt.

Inflation levels were up once again

On Oct. 13, the Bureau of Labor Statistics released data on the Consumer Price Index for All Urban Consumers (CPI-U), which measures changes in the cost of consumer goods. Although economists were hoping the index would drop in September compared to August, instead, it rose 0.4% on a monthly basis. And on an annual basis, the index was up 8.2%. 

Now on the one hand, those high inflation levels just fueled the largest Social Security raise seniors have seen in decades -- so we can consider that a silver lining. But all told, higher levels of inflation are not a good thing for consumers.

And what's even more troubling is that the Fed may now need to get even more aggressive with its rate hikes to bring inflation levels down. That could make borrowing prohibitively expensive, to the point where it causes such a major pullback in consumer spending that it leads to a massive recession.

To be clear, recession fears were mounting before the aforementioned inflation data came out. But if the Fed decides to keep pumping up interest rates, it could send the economy on a downward spiral.

Consumers should gear up for higher borrowing costs and declining economic conditions

We can't say with certainty what the Fed's next interest rate hike will look like, and whether rate hikes will, in fact, cause a recession. But many economists seem to think that's where we're headed. And so it's a good idea to prepare for that.

From a recession standpoint, shoring up your emergency fund is a great way to buy yourself protection. Aim to have a minimum of three months' worth of living expenses in the bank, though if you're the sole breadwinner in your household, you may want to aim higher.

From an interest rate hike perspective, if you're carrying debt with a variable interest rate, like a credit card or HELOC balance, then you may want to work on paying it off sooner rather than later -- before it gets more expensive for you. At the same time, if you have plans to take out a fixed-rate loan in the near future, you may want to reconsider. 

It's already gotten expensive to take out a loan, even if you have great credit. In the coming months, consumers may find that the cost of borrowing is so astronomical that it's not even an option.

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