Financially Miserable? How Inflation Could Be Giving You the Blues

Explaining Financial Misery

The official way to determine financial misery is by looking at the job market and inflation. When you add up the unemployment rate and the rate of inflation, the result is what economists call the misery index. Back in the 1970s when high numbers of people were looking for work and prices were running high, the misery index was elevated.

There are plenty of other ways to dig into what it means to be financially miserable as well. Consumer confidence metrics are falling, for example. Things we need to survive like gas, beef, and clothing are all significantly higher in price than they were six months ago. This is all despite the labor market being extremely tight, with workers in high demand.

The Dovish Years

Over the past decade, financial misery was low, following a wide range of factors. Unemployment was down, the economy was growing at a steady pace, most goods were declining in price, and inflation was negligible. In response, the Federal Reserve adopted what is commonly known as a “dovish” policy, meaning it encouraged easy money and the lowering of interest rates.

Now, the central bank is looking to tighten things up, with inflation up near 40-year highs. Some policymakers have even suggested price controls on things like gasoline and food, but that also runs the risk of encouraging black markets, and causing supply shortages. For now, the Federal Reserve is focused on enacting a series of rate hikes, with Chairman Jerome Powell admitting inflation is “way too high.”

Recession?

By almost any measure, recession is a bad word in the world of finance. That said, there are some market watchers who admit they’re willing to see one happen, in order to stop runaway inflation. In economic terms, recessions are defined as two consecutive quarters of negative growth.

The Federal Reserve’s tightening monetary policy may or may not contribute to a recession. Still, projections from the central bank suggest its target rate could be raised to 1.9% before the end of the year, and 2.8% by the time 2023 comes to a close. With inflation at 7.9%, some economists express doubt the Fed’s hikes will do much to cool off the economy.

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