Episode Details

Last Friday, the Bureau of Labor Statistics released its May Consumer Price Index (CPI) report, which showed inflation worsening. Yet the bigger story — and bigger worry — is not inflation. It’s the distinct possibility of recession. Or perhaps both (what’s termed “stagflation.”) Here are the questions I’m getting asked most often, and my answers.

1. Are we heading for a recession? Many signs point in that direction. New home construction slowed in April. Mortgage demand continues to decline. Some of the country’s largest and most influential retailers are reporting disappointing sales and profits. The stock market is in bear territory. Futures markets are signaling trouble ahead.

2. What exactly is a recession? “Recession” is a technical term, defined as two consecutive quarters of shrinking gross domestic product. The National Bureau of Economic Research is the authority that declares recessions in the U.S., and its own definition is “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” As a practical matter, recessions mean fewer jobs and lower wages.

3. When is a recession likely to happen — and should I panic? Don’t panic! If it occurs, it won’t happen immediately. I’d guess some time over the next six months. It’s a possibility that you ought to be aware of.

4. Who gets hurt most by a recession? Lower-income Americans are especially vulnerable because they tend to be the first fired when the economy slows (and the last hired when it rebounds). Recessions also hurt younger people trying to get their footing in the job market. And they can be hard on retirees whose IRAs or 401(k) accounts get clobbered.

5. Why are we heading toward a recession? Partly because of continued uncertainty from the coronavirus pandemic and Russia’s invasion of Ukraine. But the main cause is interest-rate hikes by the Federal Reserve. The Fed has raised interest rates by 0.75 percentage points so far this year, and Fed officials are signaling more aggressive increases ahead. When it meets Wednesday it will discuss raising its benchmark rate by as much as another 0.75 percentage points. That would be the largest single interest rate increase since 1994.

6. What’s the connection between Fed rate hikes and a recession? Rate hikes increase the costs of borrowing to individuals and consumers — which causes them to cut back on purchases of everything, including homes. This, in turn, causes the economy to slow.

7. Do Fed rate hikes always lead to recession? No. It’s possible we could have a “soft landing” that lowers inflation without causing a recession. But Fed rate hikes often over-shoot, resulting in recession — especially when they’re on the scale the Fed is contemplating. In 1981, for example, the Fed under Paul Volcker raised interest rates so high (to reverse double-digit inflation) it plunged the economy into deep recession.

8. Why is the Fed doing this now? Because it believes it must slow the economy in order to slow inflation, which is at a 40-year high.

9. Is the Fed correct? Slowing the economy will reduce inflationary pressures somewhat, but the Fed is operating under an old model of the economy — at a time when inflation was driven largely by wage increases. The way to slow inflation then was to take the steam out of wage increases by reducing employment. Essentially, the Fed drafted a certain number of workers into the fight against inflation by p