Like many Americans, you might wonder what’s going on in the world at the gas pump, the grocery store, and the parking lot — all places where inflation is evident. Right now we’re seeing a 40-year high rate of inflation that’s really hitting Americans in their pocketbooks. A rise in interest rates could help deflate this situation, but how this affects you in 2022? We’ll take a look.
How do interest rates and inflation affect you? The consumer price index (CPI) is a measure of price changes over time. In other words, how much consumers spend on average on a number of goods and services like food, energy and gasoline. According to the New York Times, the CPI rose 7.9% in February. This is the fastest inflation growth since 1982.
For you, that means you’re seeing prices go up on everyday items, and you’re seeing them go up quickly. Demand for these items is on the rise, impacted by tight supply chains and global events. But the prices remain high when people are willing to pay them.
This is where the Federal Reserve comes in. A rise in interest rates would combat the accelerating inflation that is spreading nationwide. The original plan was to be a series of rate hikes this year, but the Fed will proceed with caution in light of recent global events.
According to ABC News, Federal Reserve Chairman Jerome Powell said he supported a traditional quarter-point increase in the benchmark short-term interest rate. This increase is expected to come later this month. In light of the four-decade high rate of inflation, Powell did not close the door on the possibility of a bigger rate hike if needed. Other Fed officials signaled support for similar small rate hikes, while a few indicated support for a larger increase.
When the federal benchmark rate goes up, it means the rate at which banks lend money to each other goes up, and everyone will see an increase in the interest rate you pay on things like mortgages and car loans. With more expensive borrowing, consumers and businesses are slowing down investments that help slow the economy. This causes demand to fall and prices to follow. It could also help alleviate supply chain issues that help keep prices high.
Will a rise in interest rates affect you? This increase is likely to impact consumers when it comes to auto loans, but it remains to be seen how much of this change is really felt in the auto market. If you’re already paying high interest due to your situation, you might not feel the pinch as much as others. And, the impact may take a little while to be felt.
For car buyers, that means being diligent about finding the best deals. Make sure you know where your credit stands and what types of interest rates you are likely to qualify for. Remember that tight inventory also leads to higher prices, so you may need to shop around at multiple dealerships to find the best deal for your situation. If you limit your search to a two-week window, called rate shopping, all of the applications you make for the same type of loan only count against your credit score once, instead of having multiple applications for credit in your reports over time.
The current federal funds rate is 0.25%, lower than it normally holds. As the Fed’s interest rate hikes begin to impact the market, we’ll know more about the direct impact on car buyers. These will be the first rate hikes since 2018, and we’ll keep you posted on how rising federal interest rates may impact you. Look for the latest updates and issues here when they become available.