Neither the S&P 500 nor Tesla have since reached the heights they achieved on Jan. 3. The S&P 500 will begin the year’s final trading session on Friday almost 20 percent below where it was that day — and the year is set to be its worst annual performance since 2008. Cryptocurrency giants like FTX have fallen, and debt is no longer cheap.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
But even as the U.S. economy heads toward a possible recession, the Federal Reserve has said its job is far from over. Inflation, while starting to cool, is still far too high, and interest rates are predicted to rise further, foretelling more pain to come.
“Central banks drove markets this year because of inflation and that will continue into 2023,” said Kristina Hooper, chief global market strategist at Invesco. “This is a very, very dramatic, history-making moment in time. We have all been witness to a sequence of events, starting with the pandemic, that has been extraordinary.”
The Fed’s challenge became even harder in late February, when Russia’s invasion of Ukraine sent food and energy costs soaring, creating a crisis in poorer countries dependent on the import of oil and grain. In March, the Fed began to raise interest rates.
Higher interest rates are central banks’ primary tool for combating inflation. By raising rates, borrowing costs also increase, slowing demand in the economy and in theory tempering further price increases. The yield on 10-year U.S. government bonds, which underpin borrowing costs across the globe, has soared 2.3 percentage points this year, its biggest annual rise on record for data going back to 1962. In turn, borrowing rates on mortgages, company bonds and other debt ratcheted higher.
Higher costs also mean lower profits for companies, sending stock prices down. That proved especially true for tech companies, whose growth had been supported by low interest rates. The Nasdaq Composite index, which is chock-full of tech stocks, has fallen over 30 percent in 2022.
As investors lost money in the stock market, and households faced ballooning costs from inflation, the air came out of other, more speculative markets as well. The price of Bitcoin, one of the most well-known cryptocurrencies, tumbled and so-called meme stocks like GameStop and AMC Entertainment, whose share prices were propelled higher during the pandemic by a new breed of amateur investor, fell steadily throughout the year.