As inflation rates hit record highs, even wealthier Americans are beginning to sweat, and many fear that the Fed’s actions will not be enough to stem the tide.
The American economy continues to be plagued with historically high rates of inflation, leading the Federal Reserve last week to announce a massive spike in interest rates.
However, it remains unclear whether the Fed’s rate increase of 0.75%, the largest in nearly thirty years, will be sufficient to put a dent in an inflationary crisis that has grown so severe that even the wealthy are feeling the pinch.
The annual inflation rate hit 8.3% in April, a slight decrease from the previous month, but still higher than at any point in the past 40 years. The inflation rate exceeded prior official estimates, and it also surpassed wage growth, meaning that even employees who have received raises are likely making less in real terms than they were a year or two ago.
As a result, consumers are increasingly having difficulty paying for even basic needs, such as food and gasoline. According to a recent study, over 60% of American consumers are now living paycheck to paycheck, spending almost all of their monthly income on expenses with little left over for savings. Even among high income earners – those earning over $250,000 annually – 36% are now living paycheck to paycheck.
The Fed’s rate hike is an attempt to stem the tide of inflation. However, it may come with its own set of costs, punishing borrowers, quelling economic growth, and triggering fears of another recession. Foreign markets have also been impacted, with the Bank of England raising interest rates and the European Central Bank considering action as well.
The move was an abrupt reversal from the Fed’s own statements earlier this year, which indicated that it would likely go with a smaller rate increase of 0.5%. The higher rate hike was not without controversy even within the Fed: Esther George, President of the Federal Reserve Bank of Kansas City, publicly dissented from the decision, arguing in favor of the smaller hike.
Further hikes are likely by the end of the year, as the Fed has projected an annual interest rate increase of around 3.4%, nearly twice its forecast in March. It is too early to tell whether these increases will stem the inflationary tide, but the economic situation will continue to be a hot-button issue for Democrats as they head into what is projected to be a difficult midterm cycle.