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Thursday, February 15, 2018

Is Rising Inflation and Interest Rates be of Concern?

Is an increase in interest and inflation a sign of concern? The U.S. economy experienced a 1.9 percent in interest rates that relates to an increase of 2.1 percent in consumer prices.  GDP growth is expected to be somewhere around 2.5%. Economists and people are concerned that it could be early signs of stagnation if the amount of purchases decline. Is there a right answer here?

Consumer Price Index tells us how much prices are rising and what consumers are paying. Increased prices mean that we pay more.

Interest rates indicate the cost of borrowing money and impacts loans and purchased throughout the economy.

GDP is a measure of total output of the economy.

The three numbers are related. Consumers are going to find products a little more expensive, loans more difficult to pay back, and we will experience mild economic growth which can impact jobs. In essence, we are all going to get a little less purchasing power from our paychecks this year.

Is this an issue of concern?

That depends on what is going to happen over the next quarter. These numbers don't really say anything other than the economy is picking up speed and may be getting just a little hot. There are bound to be fluctuations between interest, prices, and growth.

Generally, as consumer purchases decline the market moves back into balance and prices changes slow and the economy comes back into equilibrium. When this doesn't happen it could mean that we are exporting more, importing less, or have completely changed our buying habits. I could also mean that we cannot afford the products at the higher prices and people will prefer to keep their money in the bank to receive the higher interest rate.

The biggest concern is if these things become long term and inflation rises quickly faster than paychecks and puts a dampening on consumption and overall GDP growth. If people have less purchasing power they will buy less. Rising interest rates means companies can't borrow as much but may experience some outside investment. It may also mean we don't export as much as we did before; at least in the short run.

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