In financial circles, there’s been a lot of talk about inflation. The Fed wants to encourage a moderate inflation increase and is holding interest rates low until that happens. Pessimists, though, worry about that approach. The thinking is that pent-up demand from the pandemic lifestyle could drive a sudden rise in spending once COVID-19 is under control. That influx of money into the economy would push prices higher — potentially driving inflation above the Fed’s target of just over 2%.
A short-term period of slightly higher inflation wouldn’t be memorable, but an extended run of inflation above 3% can be problematic. It raises your cost of living and chips away at your investment returns. Inflation can also increase the cost of new borrowing. First, lenders may want to charge more to offset the value they lose to inflation by the time their debtors repay. And then, the Fed may deploy its go-to move to combat inflation, which is to raise interest rates.