Annual Inflation Rose 3.7% in September. Will There Be Another Federal Reserve Rate Hike in Light of That?

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Inflation remains stubbornly elevated. Read on to see what that might mean in terms of interest rate hikes. 

The Federal Reserve has been on a mission to tame inflation since early 2022. In fact, the central bank has raised interest rates 11 times since March of last year in an effort to bring relief to consumers.

At its last two meetings, the Fed opted not to raise interest rates, citing the progress that’s been made in cooling inflation. But with two more meetings still to go in 2023, the possibility of another rate hike continues to exist.

Meanwhile, in September, inflation rose 3.7% on an annual basis, as per the Consumer Price Index (CPI), which measures changes in the cost of common goods and services. Inflation also rose 0.4% on a monthly basis.

This is a vast improvement from the inflation levels we saw in 2022. In June of 2022, the CPI peaked at 9.1% on an annual basis. So by comparison, 3.7% seems manageable.

But 3.7% also isn’t where the Fed wants inflation to be. So there’s a chance the central bank could move forward with one more interest rate hike this year to get to its optimal target.

The Fed is focused on 2% inflation

The Fed has long held that it considers 2% annual inflation to be ideal, as that lends nicely to long-term economic stability. Since annual inflation isn’t quite at that level, the Fed may opt to implement one more interest rate hike this year as a final push.

How do interest rate hikes help cool inflation? It’s simple. The Fed’s interest rate hikes influence the cost of short-term borrowing among banks and financial institutions. When that cost increases, it’s passed along to consumers in the form of higher interest rates on everything from credit cards to personal loans.

Consumers tend to balk at higher borrowing costs and slow down their spending as a result. That helps bridge the gap between supply and demand that drives inflation upward in the first place.

Meanwhile, another rate hike could hurt consumers who are already struggling given the cost of borrowing today. It’s true that consumers who don’t want to pay an exorbitant amount of interest can wait to sign a home equity or personal loan — in some cases. But for someone who needs a car to get to work, waiting to get an auto loan may not be possible.

So all told, consumers don’t want to see interest rate hikes continue. But that’s a possibility everyone should accept.

How to prepare for another interest rate hike

It’s too soon to know whether the Fed will raise interest rates again this year. But if you’re tempted to sign a loan to borrow money for an expense that can wait, holding off on 2024 could work to your benefit.

The general consensus is that the Fed is likely to start cutting rates in the new year as inflation (hopefully) continues to cool. So borrowing may become more affordable at that point.

But if you know you can’t wait to borrow, consider signing a loan now, before another rate hike comes down the pike. And also, check your credit report. If there are errors there, getting them corrected could result in a boost to your credit score. The higher your credit score is, the more likely you are to qualify for a competitive interest rate on a loan.

Of course, “competitive” is a relative term these days. But if you come in as a borrower with strong credit, you’re likely to save on a loan compared to someone whose credit is in a lot worse shape.

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