Inflation rates to come in the future likely to cause an increase in interest rates

TL;DR (2-minute read)

  • The American dollar has deflated during quarantine.
  • As vaccine rollouts improve consumers’ confidence that businesses will stay open, American citizens are becoming more financially comfortable and spending a lot more, inflating the dollar.
  • Naturally, citizens have a negative attitude towards an increase in interest rates because it makes it harder to take loans, but the Federal Reserve feels that it is necessary to curb high inflation from occurring.
  • Other international countries are expecting inflation as well for similar reasons to America.

The Coronavirus pandemic has heavily affected the economy of America and pushed the American economy into a recession. This caused the deflation of the dollar, increasing the value of the bill. However, as the Coronavirus is becoming less of an issue in society with many people getting vaccinated, consumer spending is rapidly increasing, leading to inflation. In order to combat this inflation, the Federal Reserve is planning on increasing interest rates so that fewer people will borrow money and in turn, consumption will decrease (CNBC). 

Most citizens have a negative attitude towards the change in interest rates because they are the ones who receive the burden of having to pay more, thus spending less. On the other hand, the Federal Reserve knows that a contractionary policy, a policy to decrease inflation by forcing the decrease of consumer spending, has to be employed in order to stabilize the economy. The Federal Reserve knows that if they were to do nothing, the U.S dollar would overinflate and its value would continue to deteriorate over time. 

Effect of an increase in interest rates on the economy (Economics Help)

America isn’t the only country that should be expecting inflation to come in future times. Citizens globally have also begun to spend a lot more as the pandemic is becoming less intense. Another factor in this increase of spending was that a lot of international nations have also provided their citizens with stimulus checks, promoting consumption. Joseph Gagnon, an international macroeconomist at the Peterson Institute for International Economics, predicted that the inflation will hit either late this year or next year (Marketplace). The reasoning behind his claim is that people saved most of the money that was given through the stimulus check but they will be spending more of it as time goes on. 

Economist Joseph Gagnon (PIIE)


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