Interest rates

Understand why the Fed will raise interest rates to fight rising prices

The Fed is expected to raise interest rates for the first time in nearly four years, hoping to rein in the highest inflation in decades. It may seem like a contradiction, when everything is expensive, to make it more expensive to borrow money to pay for things. This is exactly how this problem is supposed to be solved.

The challenge of high prices is in the spotlight at Pizaro’s Pizza in the Montrose neighborhood. While there’s a healthy appetite for wood-fired and Detroit-style pizza, the classic taste comes at a price.

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As the government reports, wholesale inflation is running at 10% year-over-year, which means the price of all Pizaro ingredients has gone up. Sometimes a lot.

“You talk about $6-7-8 for pepperoni for a few ounces as a topping,” says Pizaro owner Nicole Bean, “it’s, like, ouch,” it really hurts but, at the same time, you can I not get rid of pepperoni.”

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Financial strategist Lance Roberts says the inflation problem is the result of the government pumping $5 trillion in COVID relief money into the economy. With all that money to spend and producers slowed down by the pandemic, the pressure of supply and demand has only left prices on the rise. Now the Fed has little choice, to help slow things down.

“The reason you raise interest rates is to make things more expensive for you, so you won’t buy as much, which slows economic growth, which leads to ‘deflationary pressures’ which make lower the rate of inflation,” says Roberts.

These pressures could take some time. Financial watchers expect three to seven rate hikes over the coming year. Each will take months to trickle down to the economy before prices respond.

Meanwhile, companies, like Pizaro’s, are trying to manage existing costs.

“We don’t get rich on inflation,” says Nicole Bean of Pizaro. “We’re just trying to make ends meet and keep our business going.”