According to data from March 2022, the rate of inflation in the United States rose to 8.5% in the past 12 months. Excluding food and energy (the so-called core CPI), it rose to 6.5% in the past year alone. Inflation has hit record highs around the world, with inflation in the UK soaring to a 30-year high of 7%, Germany at 7.3%, and India reporting a 17-month high of 6.95%. Persistently rising prices of goods and commodities have been exacerbated by a surge in gas prices and the war in Ukraine. The drop in unemployment (to 3.6%) is not sufficient to combat the surge in prices, even with wage growth at 5.6% and a stronger job market. 

This unsettling trend has left many people wondering: will inflation slow down soon? What can be done to prevent the problem from getting worse? And what action will the Federal Reserve take over the next 12 months?

Has inflation peaked or will the upward trend continue?

Inflation does not seem to have reached its peak, and further, it may remain elevated for the next few quarters. Consumers have experienced a widespread increase in prices across all sectors. COVID-19 supply chain shortages continue to cause disruptions and price inflections. 

With the continuing COVID lockdowns in China and geopolitical concerns across the globe, it is likely that we will continue to see higher rates of inflation until some of these tensions and restrictions have begun to ease.

We have yet to face the aftermath of the current crisis in Ukraine. The bans on Russian energy imports and other sanctions may have crippling effects on the economy. This trend was evident in the March inflation data and could continue to keep inflation higher. Both Russia and Ukraine produce materials that are used for semiconductor production; thus, the current semiconductor shortage may intensify and cause ripples across other parts of the supply chain, affecting many other goods and services.

How can we combat inflation?

To fight rising inflation, the government uses strategies such as monetary policy changes. The Fed recently raised key interest rates for the first time since the pandemic began and signaled that there could be seven more rate hikes this year as an effort to rein in the highest inflation we’ve seen in four decades. An increase in interest rates typically results in more savings (i.e., bank CDs pay higher interest), less disposable income (i.e., rate hikes affect interest on mortgages), and lower spending for consumers. Inflation runs hot if the demand surges but lower spending can reduce the demand. This, in turn, helps to curb inflation. 

Another tool, such as a strong Dollar, can also help to control inflation. The US Dollar has been gaining strength due to a variety of reasons, from traders bracing for the aggressive Federal Reserve rate hikes to its use as a global reserve asset and a safe haven for investors. Put simply, stronger currency makes imports cheaper. Since many commodities such as oil are priced in USD, a strong Dollar means lower commodity prices. In addition, increased risk in Europe due to the impact of war may likely direct more investments toward the US, thus strengthening the US Dollar. A stronger USD also increases domestic purchasing power, which should strengthen consumer purchases and drive economic growth.

What is the trajectory of Federal Reserve rate hikes?

Based on the March meeting’s “dot plot” released by The Federal Open Market Committee, members anticipated the Fed Fund rate to be 2.8% by 2023. Per Fed’s Chairman Jerome Powell’s speech on April 21st, the Central Bank indicated that there is a high probability of increasing the interest rate by 50 basis points in May to control higher inflation. A few pundits are predicting that The Fed may initially take an aggressive stance to control inflation, but will slowly reduce the pace of the interest rate hikes. With that, I anticipate that the FOMC will raise the 50-basis point hike in May 2022 as long as they don’t run the risk of inverting the yield curve. 

Fed Governor Lael Brainard announced that the Central Bank aimed to bring inflation down to 2%, an ambitious goal that will require a vigorous strategy. Brainard, who has displayed a tough-on-inflation stance in several recent remarks, suggested that we could begin to see interest rate hikes at a faster pace than usual.

Looking ahead, I believe the global market will continue to be influenced by the Central Bank’s monetary decisions, the Russia-Ukraine war, and economic readings such as inflation data, wage growth, and many more factors. Investors may experience continued market volatility in the near future, but a diversified portfolio with long-term goals can help you weather the storm and still reap positive returns.  

About the author: Komal Motwani, CFP®

With over 10 years of experience in the field of Investments and Financial Planning, Komal Motwani has worked and studied in institutions across the globe, from India to Singapore and the US. She is proud to have earned CERTIFIED FINANCIAL PLANNER™ certification, as the number of women (especially women of color) to receive this certificate is historically low. Motwani now works as a Senior Investment Analyst at Yanni & Associates Investment Advisors, LLC. 

Komal Motwani, CFP ®   is a senior investment analyst at Yanni & Associates Investment Advisors, LLC., a Pennsylvania-based registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

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