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Fed Hikes May Not Be Enough to Quell Inflation

The Federal Reserve has indicated that it will begin to progressively increase interest rates in mid-March in an effort to bring down the sky-high inflation. “Against a backdrop of elevated inflation and a strong labor market,” said U.S. central bank chief Jerome Powell on January 26th, “[the Fed’s] policy has been adapting to the evolving economic environment.” Rate hikes are usually regarded as the best remedy for inflation, as higher rates dampen spending and encourage saving.

Yet the Fed’s rate-hike strategy will do very little to combat the ongoing supply chain crisis. Higher interest can muffle spending, but it won’t help businesses stock their shelves any faster than they can now. With the supply chain backlog expected to continue well into this year, and possibly into 2023, moderate spending can keep inflation up.

Higher rates also bear little impact on some of the largest contributors to recent inflation. According to the Consumer Price Index, food and energy prices, which have typically been more volatile than other categories, both gained 0.9 percent in January. Fuel oil rose 9.5 percent, more than any other item in the January CPI report. And, despite a 0.8 percent drop in gasoline prices, the average price per gallon in the United States climbed to $3.44 in the first week of February.

When inflation rates are high, the Fed usually raises interest rates; when interest rates are high, borrowing money becomes more expensive. An increase in the cost of borrowing can reduce demand for commercial real estate. However, if the rate hikes are not able to keep up with inflation as many experts expect, commercial real estate might continue to be used as an inflation hedge by many risk-averse investors.

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