High inflation, turbulent markets and economic instability continue to be some of the themes of 2022. There are many uncertainties about what’s to come, but layoffs, higher interest rates and even a recession are all possibilities.
Let’s take a look at the current conditions and what they could mean going forward:
Summer 2022 Inflation
As we’ve seen since the beginning of the year, inflation continues to be at a 40-year high. As of May 2022, the rate was sitting at 8.6%. Some indicators are pointing to a potential peak, though time will tell if that’s true or not.
At this point, the Federal Reserve is expected to make more interest rate hikes through the rest of 2022. This is the most aggressive interest rate increase schedule that we’ve seen since the early ‘80s. The Fed has acknowledged that these interest rate increases could weaken the economy, but they are necessary to bring the inflation rate back down to an acceptable level. The risk is that the higher the interest rate goes up, the closer we get to a potential recession.
Recession Signals – Summer 2022
High levels of inflation have led to recessions before, and about half of economic experts believe the economy will contract within 12 to 18 months. As the supply of money slows, companies cut back and layoffs happen.
However, if a recession does occur, indicators point to a growth recession, not a classic recession. A growth recession occurs when the economy is still growing, albeit at a slow enough pace that more jobs are being lost than created.
What Does This Mean for You?
A recession may be in the cards for the U.S., but when it happens and how severe it might be are very up in the air. For now, pad your emergency fund if you can, and avoid the temptation to change your portfolio too much. A balanced portfolio is designed to weather recessions, and they often bounce back when the economy does. I have more information about how to invest during a recession here.
Here are some other posts about managing your finances during a recession:
Roundup: What to do when the Markets are Down
2022 Rising Interest Rates, Inflation and the Russia-Ukraine War: What to Expect
Why Your Portfolio Needs Diversification
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