Looking back on the big story of 2022, the one that is carrying over into 2023 … inflation.
Key Details
- The Consumer Price Index (CPI), the benchmark measure of inflation, peaked at 9% year over year during the summer — the highest since 1981 — and is now 7.7%. In January 2021 CPI stood at 1.4%.
- Most Americans had never experienced such high inflation, shocked as the price of meals and merchandise shot up.
- Near-0% interest rates had driven business investment, boosted revenue and profits, and sent the stock market up in 2021 and early 2022.
- To curb inflation, the Federal Reserve raised interest rates during the year, bringing the target rate from just about 0% to 4.5%.
Why it’s important
The Fed’s aggressive rate hikes — meant to slow the economy and ultimately consumer spending — sent stock prices plummeting and shaped the landscape for the economy and stock market for 2022.
The effect on every aspect of the economy was dramatic.
- In December 2021, the rate on the 30-year mortgage was at 3% — now it’s more than 6%, having fallen from above 7%. The housing boom that followed the pandemic is a bust, and home prices dropped.
- The S&P 500 Index is down more than 20% for the year—having risen 28% in 2021.
- Bonds, which typically do well when stocks perform poorly, also dropped—hurting the traditionally stable 60/40 asset balance investing.
- Often considered a hedge against inflation, cryptocurrencies dropped more than any other asset—bitcoin fell 68% since January 2022.
Consumers are suffering as a result. Savings are dwindling and credit-card balances are rising.
The one up note for the economy are jobs. The unemployment rate is a historically low 3.7%.
What 2023 holds is up for much debate, with the majority of economists predicting a volatile stock market and an economic recession.
What people are saying
There are two real schools of thought.
One side argues that the Fed has already raised rates too much and that plunging the economy into a recession is an overreaction to inflation, which they argue has peaked and is declining. Stop raising rates, they say.
The other side looks back at the 1980s when Fed Chair Paul Volcker aggressively pushed rates into the double digits to fight inflation, sending the economy into a recession. Today’s scenario is much different, with the economy in good shape, inflation not nearly as high, and rates not expected to increase to anywhere near the 15% interest rate of the 1980s. Still, they say, maintain rate hikes until inflation is down to the 2% to 4% range.