COURTESY DR. JEREMY HORPEDAHL
INFLATION, INTEREST RATES, RECESSION AND YOU
By Dr. Jeremy Horpedahl Por Dr. Jeremy Horpedahl
Decoding the Economy. INFLATION, INTEREST RATES AND a
What is causing all of this inflation? While there are many factors involved, a big reason is that during 2020 the U.S. Federal Reserve Bank created more dollars. For example, when stimulus checks were given to more Americans, this was done by creating new money and depositing it in people’s bank accounts or by mailing them a check. As that new money has been spent over the past 12 to 18 months, the result has been a rise in prices. How does a rise in prices at grocery stores lead to higher interest rates? To fight inflation, the Federal Reserve is now trying
22 | ARKANSAS FLAVOR • WINTER 2022
have their pay reduced. This would be bad at any time, but it would be especially bad right now if prices in the economy continue to rise while we deal with the inflation that many countries around the world are facing. What can you do in response to these issues? While this feels out of your control, here are three steps you can take: 1. SAVE: Having some money set aside for financial emergencies is always important, but especially if we enter a recession. Every dollar makes a difference in your savings account.
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to reverse what it did in 2020, to reduce the amount of money in the economy, or at least to slow down the growth rate. One of the ways to do this is by raising interest rates that it charges to banks, which then increases what banks charge their customers to borrow money. Higher interest rates should reduce prices in the future, but it may have another, more immediate negative effect on families. As the Federal Reserve raises its interest rates, other interest rates in the economy will rise, too. The cost of borrowing money to buy a home has risen a lot this year, for example. That makes it harder for anyone who wants to buy a new home.
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possible recession are all over the news. But what do these concepts mean? And how might they impact you? The economy can be a confusing topic, but the effects can be very harmful. Inflation, or a rise in prices, is happening right now for almost all products and services that we buy every day. If you buy a dozen eggs at the grocery store, it will cost somewhere around $3, but a year ago, that many eggs cost about half the current price. Similarly, a gallon of gasoline in Arkansas is a little over $3 right now, but it was around $2 at the beginning of 2021. These higher prices hurt families because even though their paychecks have increased, they haven’t increased as much as prices have in the past year. Because of inflation, we can buy fewer goods and services with our income. The average American’s wages only rose about 6% in the past year, while average prices went up about 8.3% in the United States over that same time period. Data shows that prices are even higher in Arkansas and three neighboring states, up 9.4% in the past year and up 15.9% for important products like groceries in our part of the country.
All of this leads to what we call a recession, a time when economic activity slows down. What we see then is businesses that lose money or have to close, which then results in job losses for workers. And even workers who don’t lose their jobs could see pay raises slow down or even
2. PROTECT THE VALUE OF YOUR DOLLAR: Inflation may cause you to wonder if any money you save will lose value because of inflation. Two investments offered by the U.S. Treasury can help you protect your savings against inflation, “Series I Savings Bonds” and “Treasury Inflation-Protected Securities.” 3. CHECK FOR DEALS: If saving money in these times is a big challenge for you, try to save through deals and coupons through mobile phone apps offered by most restaurants and grocery stores. If the price of your favorite burger has jumped $2, check out the app. You may find a deal that gets you two for the price of one. n Dr. Jeremy Horpedahl is the Director of the Arkansas Center for Research in Economics and a professor of economics at the University of Central Arkansas. He received his Ph.D. in economics from George Mason University in 2009, concentrating in public choice, public finance, and economic history. You can find more of his advice at twitter.com/ jmhorp.
