By Peter Melahn, Staff Writer
The Consumer Price Index (CPI) rose 6.4% from last January, indicating continuously high levels of inflation in the U.S. economy. The announcement of new rates last Tuesday is a decrease from a rate of 6.5% growth in December 2022.
The CPI is a measurement of how the expenses of an average American change over time. It takes into account price changes in goods that are most commonly consumed on a regular basis such as gas, food, clothing and medical services. An increase of 6.4% means that the expenses of an average American this January are 6.4% higher than they were a year ago.
To combat inflation, the Federal Reserve has the power to set interest rates on loans. By increasing these rates, loans become more expensive The hope is that the demand for loans from banks will go down. In turn, the demand for other goods will decrease as well, forcing producers to lower their prices.
Since the beginning of the COVID-19 pandemic, the Federal Reserve has been responding to rising prices by incrementally increasing these rates. Over the past several months, the Federal Reserve has been raising interest rates at a historic pace by increments of up to 75 basis points, or 75 hundredths of a percent.
More recently, however, the Federal Reserve has opted to decrease their interest rate hikes to smaller increments as low as 25 basis points. The more dramatic hikes proved useful in cooling inflation from a record high 9.1% in July 2022, but this month’s announcement of new rates is less promising; the increase in CPI decreased by 0.1% from December to January.
In response to these new rates of inflation, Dr. Jae Hoon Choi, a professor of macroeconomics at Xavier University’s Williams College of Business, explained: “This announcement was important because it’s going to critically affect what the Federal Reserve is going to do in March.”
The Federal Reserve meets every six weeks to determine a course of action in response to changes in the economy and will meet this March to decide their next steps. Choi and other experts predict that interest rates will be pushed even higher, this time even more dramatically.
This, in turn, could have drastic effects on other aspects of the economy such as the job market. Though unemployment is at a historic low, high-paying, high-skilled jobs will likely be harder to find after this March. Firms will be affected by higher interest rates because they take out loans. Employers, in turn, will be less keen to hire new workers who command higher salaries — workers with college degrees graduating this spring.
“That’s why this inflation number was very important,” Choi explained. “March interest rates are going to determine how companies are going to plan their investment (in workers) in April and May… which coincides with graduation.”
“Nothing is certain,” Choi said. “Uncertainty is not something people like, so that’s why we want to look at what’s going on every day… then we can actually make a better plan.”