Inflation Is Already Back on the Rise. Will the Fed Raise Rates Again?

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The Federal Reserve opted not to raise interest rates at its last three meetings. Will a surprising inflation report change things? Learn more here. 

Inflation has been making many consumers miserable since 2021. That year, living costs began to surge as consumers found themselves with extra money thanks to generous stimulus policies at a time when there was a limited supply of goods.

At this point, though, many consumers have depleted their stimulus-related cash savings and are having a hard time coping with higher expenses. And given that there’s really no more stimulus aid on the horizon, a lot of people are now in a tough financial spot.

The Federal Reserve has been trying its best to fight inflation. And it’s done a good job of helping it cool by raising interest rates numerous times in 2022 and 2023.

At its last three meetings, though, the Fed opted to hit pause on its interest rate hikes due to the progress made on the inflation front. And the Fed even signaled that rate cuts could be in store for 2024.

But the newest inflation data points to a rise in living costs. And that might get the Fed to change course.

Inflation is on the rise again

In December, annual inflation was measured at 3.4% as per that month’s Consumer Price Index. On a month-to-month basis, inflation rose 0.3%.

Now that rise in inflation is by no means extreme. However, inflation did rise at a faster pace than what economists expected. And if that trend continues in 2024, the Fed may have no choice but to raise rates again rather than cut them, to keep living costs to a manageable level.

How consumers can prepare for interest rate hikes

The problem with interest rate hikes is that they have the potential to make borrowing a lot more expensive. To be clear, it’s not as if the Fed tells lenders how much interest to charge. But when the Fed raises its benchmark interest rate, it becomes more expensive for financial institutions to borrow from each other short term, so that cost tends to get passed onto consumers.

In light of this recent inflation data, you may want to take steps to put yourself in a position where you don’t have to borrow money in a pinch. And to that end, you should do your best to boost your emergency fund, or build one from scratch if you really don’t have much in the way of savings.

A good bet, in fact, is to aim for enough money in the bank to cover three months of essential bills. It may take time to build up that level of cash reserves, but for now, any dollar you manage to save is a dollar you won’t have to borrow.

It’s also a good time to try to pay off any lingering credit card debt you have. If interest rates rise, your existing balance could become more expensive, since credit card debt is generally variable (as opposed to installment loans, which offer the benefit of a fixed interest rate).

It’s too soon to assume that the Fed is going to raise interest rates in 2024. But it’s a good idea to keep that possibility in mind — and prepare for it accordingly.

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