How does one combat inflation?

Interest rates.

That’s the most effective tool in the toolbox for economists and policymakers alike when it comes to countering high inflation. Indeed, the 15-year stretch of cheap money appears to be over as the Federal Reserve has signaled that multiple interest rate hikes are forthcoming this year. The only remaining questions are:

• When?

• How many?

• What level?

Markets have already responded to the indications from the Federal Reserve. In early January 2022, a home buyer could secure an interest rate near 3% on a 30-year home mortgage. By mid-April, that number moved closer to 5%. That’s nearly a 2% hike in just 90 days. Given rising inflation rates, these interest rate figures will climb even higher.

Fastest pace since December 1981

Inflation leapt to 8.5% this March when compared to the same time last year, reported the Bureau of Labor Statistics. That’s the fastest pace since December 1981. The 8.5% inflation rate is also up from February’s 7.9% and January’s 7.5%. Overall, this marks the sixth straight month inflation has topped 6%, and it places inflation levels well above the Federal Reserve’s goal of 2%.

The reasons for high inflation rates are boundless.

In March, gasoline, shelter, and food topped this list with gasoline skyrocketing 18.3% when compared to the same time last year due to supply chain shocks in Russia and Ukraine. Overall, fuel costs have been on the inflation leader board for some time as diesel costs alone have added 30 cents a mile to trucking costs in two years, estimated FreightWaves. In the food category, meat prices moved upward at a 14.8% clip compared to last year, while breakfast cereal climbed 9.2% as grain prices moved skyward due to the Russian invasion of Ukraine.

Just one month earlier, rising energy costs, food, and services topped the list. There had been hope in February that the global supply chain was finally beginning to be restored to its pre-pandemic scale. However, the start of the Eastern European conflict unraveled that trajectory. In a bright spot when it comes to inflationary prices, the used car and truck market finally began to cool off after a double-digit gain over the past year.

In January 2022, data from the Bureau of Labor Statistics listed food, vehicles, shelter, and electricity on top of the inflationary list. Of those four items, the inflation leader was rental prices for housing.

The root causes for inflation

Inflation can result from strong consumer demand. That’s certainly been a driver as of late. Other contributing forces have been government stimulus to counter the pandemic, supply shortages, and global conflicts. Those are among the ingredients that have created 40-year high inflation rates. And hence, the era of rising interest rates will surely follow.

The next question — is your farm or agricultural business prepared with strategies to lock in the best possible interest rates for the longest time horizon?

There’s still time to act. Communication with your lender is of the upmost importance.

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(c) Hoard's Dairyman Intel 2022
April 14, 2022
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