We’re back with more inflation news — and so is the Federal Reserve. 

In a September meeting, the Federal Reserve announced it was raising interest rates 75 basis points — hoisting the federal funds rate to a target range of 3.0 to 3.25 percent.

The move was unsurprising. This is the fifth rate hike this year as the Fed attempts to cool down an overheated economy. But why does this keep happening? And what does it really mean for the rest of us? Here is what you need to know.

Why did the Fed hike rates again?

Simply put: the Fed is doing its bit to control inflation and the original rate hikes may not have been enough.

As we discussed in What Is Inflation and Is it Happening Now, inflation is usually triggered by an imbalance in supply and demand driven by a few key factors. When the economy speeds up rapidly, for instance. When there is a shortage in labor or materials — like computer chips or gas. Or when an economy goes through a major event like an unprecedented pandemic.

Given that we’ve lived through all those key factors recently, inflation seemed almost inevitable.

And, unfortunately, it was. Consumers have been feeling the squeeze of rising prices in everything from gas to groceries to home purchases in the last year.

That is where the Fed comes in. The Federal Reserve doesn’t control consumer prices directly, but does control the federal funds rate, which is tied to several rates in the economy. By raising the rate, the Fed can try to temper inflation. (Want to learn more about how the Fed impacts the economy? Check out The Fed and Inflation: What You Need to Know.)

Isn’t inflation getting better?

In August, the Consumer Price Index — the measure of costs across dozens of consumer goods — showed that inflation landed at 8.3 percent. That is lower than the 9.1 percent we saw in June (the largest increase in 40 years) or the 8.5 percent in July, but that may not be a reason to celebrate, yet.

For one, while some costs are finally trending down, others are starting to feel like a runaway train. For example, gas prices had been falling steadily, but food prices increased 11.4 percent in the last year (Note: gas prices are rising again as of this posting). Low, stable inflation is normal — and even healthy for the economy — but big jumps in some categories are not so ideal.

To keep prices stable and the economy moving along, the Fed aims for a 2 percent inflation rate. The Federal Open Market Committee, the policymaking arm of the Federal Reserve, considers this their benchmark. According to an FOMC statement, “The Committee would be concerned if inflation were running persistently above or below this objective.”

How will this impact my wallet?

So, the Fed is doling out rate hikes to try and stabilize inflation closer to 2 percent. Experts agree that in the long run, the inflation we’re dealing with now will level out — but it could take months to see a real impact.

In the meantime, you’ll likely see some short-term changes:

• Variable interest rates may go up: Variable interest rates on credit cards tend to trend with the Fed rate. As the Fed rate increases, the rate on your credit cards may go up.
• Mortgages cost more: Mortgage rates have been rising steadily lately, but don’t expect that to change soon. New mortgages and existing adjustable-rate mortgages reaching the end of the fixed period may get costlier.
• Savings rates may go up: A higher Fed rate can lead to an increase in interest rates for savings accounts and high-yield products. That’s a win — but it could take months to see the boost.

What should I do now?

The impact inflation is having on your wallet is probably pretty easy to spot and sometimes it does feel like everything we buy is getting more expensive by the day, but there are still ways you can curb the damage.

If you’re carrying debt and financially able to pay it down, now may be a good time to do so. As credit card interest rates rise, you will end up paying more overall for your debt than you would have last year.

Once you pay down your debts, it is also a great time to start stocking cash away in a savings account. If interest rates increase, it will be a boon for savers.

Your credit union offers both a Member Savings account and high-yield savings solutions to help you get the most of what you put away. And, members have access to support from Balance, including access to a counselor you can call to discuss debt and budget coaching or your overall financial fitness.