When your seatmate on the plane talks about the Fed, you know things aren't right
AYESHA RASCOE, HOST:
The health of the U.S. economy is on the mind of many Americans these days. When will it settle down? How will it settle down? And how will it affect the labor market? The core concern - inflation. It's been impossible to escape. New numbers come out this Thursday, data the Federal Reserve will use as it attempts to keep inflation in check. But doing so could also come at a pretty high cost for American employment. NPR's Stacey Vanek Smith joins me. Hi, Stacey.
STACEY VANEK SMITH, BYLINE: Hi, Ayesha.
RASCOE: So what are people hoping to see this week?
VANEK SMITH: So people are hoping to see inflation go down, right? I mean, prices have been rising a lot this year - overall, more than 8%. And then for some things - like eggs and gasoline and rent - those prices have gone up much faster. And in fact, you know, I sort of feel like we've all had, like, a little moment where the price of some little thing has risen in a way that's really shocked us, inflationwise. I don't know if that's happened to you, if you've had an inflation moment in recent history.
RASCOE: Yes. When I went to the grocery store and what would normally cost me maybe 150 is now like 200, 250. The ending price shocked me 'cause I wasn't buying anything new.
VANEK SMITH: Yes. I really had the same moment. In fact, I talked to a lot of people about inflation. I talked to this man, Jeff Smith (ph), in California. And for him, he had this moment. It was at a convenience store.
JEFF SMITH: I was buying these prepackaged cinnamon rolls, and I just picked it up. And it's something I've bought periodically for years. It was eight bucks for a package of, like, six cinnamon rolls. That seems like double what it used to cost.
VANEK SMITH: So after Jeff's cinnamon roll moment, he took a really close look at his family finances. He and his wife have four kids, so things can add up really fast. And he said he was shocked.
SMITH: I do a budget where I look at how much I spend each month on food and clothing and those types of things, and that's gone up at least 30 or 40% from where it was last year. And we're like, that is way too much.
VANEK SMITH: And when they looked, nothing had changed in their routine, but the prices had changed. So they started looking for ways to cut back. No more eating out. No more family road trip over the summer. I think a lot of us have made cuts like that. And for businesses and for an economy, that is not good.
RASCOE: So the effect of inflation is that people stop buying things or they buy less, right?
VANEK SMITH: That is exactly right, yes. And it can get worse. I mean, if inflation really gets out of control - if you start paying, like, $20 for a package of cinnamon rolls - things happen, like your savings is suddenly worth a lot less. You start making more and more and more cutbacks. That's bad for the businesses that want you to buy things from them. If inflation gets out of control, it can really destroy the whole economy. But never fear, the Federal Reserve is on the case. It has been raising interest rates since March because it is the Fed's job to keep inflation under control.
RASCOE: So remind us how raising interest rates helps control inflation.
VANEK SMITH: When interest rates go up, it becomes more expensive to borrow money, so people borrow less money, so they spend less money, so they buy less stuff. And then that means demand goes down and eventually, hopefully, that brings prices down. But this is where things get sticky because - you know there's that saying where it's like, you had one job, you had one job? The Federal Reserve does not have one job. It has two jobs. It is called the dual mandate. And one of the jobs, like we've been talking about - keeping inflation under control. But the other job is keeping unemployment low. And when you raise interest rates and people spend less, it also means the companies are not selling as much stuff. And so they tend to stop hiring or even lay people off. And we see unemployment go up.
RASCOE: And that leads to concerns about a recession, I would think. But Friday, there was a jobs report. It looked pretty strong. What does that tell us about what's going on with the economy?
VANEK SMITH: So it did look really strong, and that is great news. But there were these little signs that things are sort of softening. So everybody got very nervous because if that softening keeps up, if layoffs start to happen, then all of a sudden, the Federal Reserve - its two jobs are fighting each other, right? It's like dueling dual mandate. And we saw this about 40 years ago, which is the last time inflation in the U.S. was really high. It was up in the double digits. The Federal Reserve did keep interest rates jacked up for a long time, and that eventually did get inflation under control. Prices did come down. But it also, like you said, caused a huge recession and unemployment went way up. It was more than 10%.
I mean, jobs versus prices - it's just not a choice anybody wants to make, although if there is a choice, Federal Reserve Chair Jerome Powell has made it pretty clear that inflation is going to win that duel of the dueling mandates. Even if some jobs are lost, he's made it clear he's willing to pay that price, at least for a while. But luckily for now, like you say, Ayesha, the job market is strong and hopefully, you know, we can all just keep having our cinnamon rolls and affording them, too.
RASCOE: That's NPR's Stacey Vanek Smith. Thanks so much for talking with us.
VANEK SMITH: Thanks, Ayesha.
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