Will November's Positive Inflation Report Put an End to Interest Rate Hikes?

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KEY POINTS

  • The Federal Reserve has been hiking up interest rates in an effort to slow the pace of inflation.
  • A substantial dip in November could inspire the Fed to slow down or even put that practice on hold.

A notable drop in inflation levels could spell relief for consumers in more ways than one.

Since mid-2021, consumers have been struggling due to inflation. Costs have been up for well over a year across a range of categories, from housing to healthcare to food. And many people have been forced to dip into their savings accounts and rack up costly credit card debt just to make ends meet.

The Federal Reserve, meanwhile, has been on a mission to cool inflation. And so over the past number of months, it's been aggressive in raising interest rates in an effort to make borrowing more expensive.

The Fed doesn't directly set consumer borrowing rates, like the interest rates credit cards and auto loan lenders charge. Rather, the Fed oversees the federal funds rate, which is what banks charge one another for short-term borrowing purposes. But when the federal funds rate increases, it commonly drives consumer borrowing rates upward.

Why does the Fed want consumers to pay more to borrow at a time when costs are up? It's simple. The whole reason inflation has been soaring is that the demand for goods has exceeded the available supply. The hope on the part of the Fed is that higher borrowing costs will slow down consumer spending, thereby bridging that gap and bringing inflation levels down.

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Meanwhile, recent data on the inflation front points to things moving in a positive direction. But will that be enough to get the Fed to back down on interest rate hikes? Or will consumers continue to see the cost of borrowing go up?

A notable drop in inflation

In November, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, rose 7.1% on an annual level. Now that's still a very high reading. But it's also much lower than October's 7.7% annual CPI increase.

In fact, the CPI has consistently been registering lower annual increases since the summer. And that's an indication that while inflation is still a problem, it's slowly but surely becoming less of one.

Will the Fed give consumers a break?

Now that inflation levels seem to be dipping, it's conceivable that the Fed will opt to slow down its interest rate hikes rather than move forward with substantial ones. But is the Fed likely to not raise interest rates at all at its next meeting? That's doubtful.

The reality is that a lot of consumers are still struggling to pay their basic expenses. And while we're in a better place with regard to inflation now than we were over the summer, there's still a long way to go until the cost of living falls to a more moderate level.

As such, we shouldn't expect the Fed to say it won't raise interest rates at all in the near term. But ideally, it will slow the pace of rate hikes so that consumers who need to borrow won't face a major affordability crunch.

In fact, a lot of people will no doubt be closing out the holiday season with a pile of debt to pay off in the new year. The less expensive it is for them to do that, the less of a long-term financial hit they stand to take.

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