We are now 18 months into inflation that is above the 2.0 to 2.5 percent level that the Federal Reserve targets as a normal rate of inflation. To slow that inflation rate, the Fed has raised their benchmark interest rate five times, from 3.25 to 6.25 percent. This has the effect of increasing the cost of borrowing, thus reducing consumer demand. It also increases the risk of a recession. It is too early to predict a recession, and economists, including this columnist, have a poor track record of predicting recessions. However, it is not too soon to think through what we might expect with a recession and what unexpected risks might accompany a downturn.

The goal of the Fed’s higher interest rates is to cause consumers and businesses to purchase fewer goods and services. Naturally, the higher prices of inflation cause consumers and businesses to alter the mix of products they buy, but it doesn’t necessarily reduce demand. Higher interest rates do reduce demand, especially for big ticket items such as automobiles, RVs, homes and appliances.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. His column appears in Indiana newspapers.