What's going on?

Inflation in the US continues to climb (i.e. prices are increasing at a faster rate). And that could mean interest rates will follow suit soon!

What does this mean?

According to data out on Wednesday, consumer prices (e.g. rent or movie tickets) jumped 1.9% versus a year earlier, very close to the US Federal Reserve�s 2% target (why does the Fed target 2%? click here). Part of the increase was driven by higher fuel prices versus a year ago, but even stripping those out inflation ticked up.


Combined with rhetoric from Fed officials suggesting that the Fed should raise its target interest rate soon, investors are placing a much higher probability of a rate hike at the Fed�s meeting in two weeks than they were earlier this week.

Why should I care?

For markets: The effect on the market of higher interest rates is usually mixed.

Typically, higher interest rates are bad for bonds and, sometimes, stocks that act like bonds (i.e. big, safe companies that pay investors a high cash dividend). That�s because such investments are less attractive today if investors think they will get paid a higher rate of interest in the future. Banks, however, tend to do well as they can charge their clients more to borrow money. Higher interest rates also tend to push up the value of the dollar, as global investors move their money into dollars in search of a higher payout (click here for more background). In short, rising interest rates impact different investments in different ways.


For you personally: Higher interest rates likely mean higher borrowing costs for you.

As interest rates go up, banks become more likely to increase rates for things like mortgages and business loans. Some investors expect the Fed to increase its target interest rate by 0.75% this year, which could feed through to substantial increases in borrowing costs.