Yesterday the Fed increased interest rates by 0.75% to fight inflation—and news pundits went nuts with the idea that it is now pushing us into a recession.
So is this a recession we’re about to be in, or just high inflation?
The answer is both.
Economists call it ‘stagflation’, but that may not mean anything to you or I, so I’m going to put it in a way that we can understand.
This is how we got here:
People stayed at home and got paid stimulus (free money for zero productivity).
The economy expanded with the free money… but more things aren’t being made while people are at home. There are inevitable supply shortages.
Reduced supply creates high demand because more people are fighting over fewer things—and we get inflation, aka higher prices.
Prices are higher, so people then buy less… Creating lower demand.
Demand is then low, but supply is still low. So prices remain high.
Voilá! That’s stagflation.
This is particularly dangerous because the usual way to buy a country out of recession is with a loose monetary policy. But you can’t do that with record inflation.
We’re all in for a bumpy ride.