Inflation continues to rage throughout the economy. Earlier this month, the consumer price index, an estimate by the Bureau of Labor Statistics of the change in costs consumers pay for goods and services, rose 8.6% year over year in May. Meanwhile, the producer price index, the change in prices received by domestic producers for their outputs, increased by 10.6%. The latter number suggests that inflation is accelerating, not decelerating, as sooner or later, these costs will have to be passed on to the consumer. And, of course, the most notable metric of inflation is the cost of gasoline, now above $5 per gallon and certain to go higher as the summer driving season kicks into high gear.
untitledThe problem is so serious that last week, the Federal Reserve raised its benchmark interest rate by 75 basis points, the largest hike in nearly 30 years. The Fed also indicated it now plans to hike rates more than previously expected. These rate hikes make it more expensive for banks to borrow, a cost that will be passed on to consumers, making it harder for them to acquire money and thus reducing the number of dollars chasing goods in the economy.

It’s a dangerous game the Fed is playing, though they have no other choice. The goal is to raise rates just enough to tame inflation but not so much that a lack of credit forces the economy into a recession. The last time the United States faced inflation levels of this level was in the early 1980s, and the Fed’s aggressive moves promoted the nasty recession of 1982-83.