Retired benefit from Fed’s interest rate increases to lower inflation

Published 1:30 am Friday, May 31, 2024

The Federal Reserve has historically desired a 2 percent inflation rate and uses the interest rate to control it.

That means that a nickel Coke from 50 years ago will never be only a nickel ever again. Inflation occurs when the value of money decreases. The value of money is the cost to borrow it. The interest paid on a loan, credit card, or mortgage is the cost and value of that money. If the interest rate is low or zero, people spend tomorrow’s income, by financing, charging, etc., because it doesn’t cost them any more to acquire the good or service now and pay later, and hence the demand drives the price up.

If you can borrow at 1 percent, buy the good or service now, and pay it off later after your income may have increased 2 percent; that is smart. However, that does not help the cash-only buyer who buys only what they can pay for today and the price has already been driven up by non-cash buyers. This is why the Fed raised interest rates. This raise will slow, not stop, inflation to an acceptable level.

So you have to make choice: Do you like low interest rates with high inflation, or higher interest rates with lower inflation? Typically, retired folks such as myself, are done buying big ticket items (houses, boats cars, etc.) and low interest and high inflation for food, utilities, medical is not advantageous. High interest on our savings and low inflation on our expenses is more desirable.

Bill Severson

Stanwood