• May’s inflation report showed prices skyrocketing at the fastest rate since 1981.
• The Fed will now have to act even more aggressively to slow this price spike.
• It could mean more expensive borrowing, plummeting stocks and a potential recession.

Friday’s release showing inflation at a 41-year high in May dashed all hopes that price increases had peaked in March.

It means the

Federal Reserve

is under more pressure than ever to contain inflation by raising interest rates, a practice that affects nearly every aspect of the average American’s finances. The central bank has long been expected to raise rates at each of its next two meetings, including one next week. Now he faces calls to become even more aggressive.

What form the aggression might take is still up for debate, but one thing is clear: inflation is getting worse at a time when it is already supposed to have peaked, and the Fed will have to be even more strict if she wants to solve the problem.

A stronger stance, however, is bad news for many of the things that precede a

recession

ranging from stock prices to mortgage rates and from credit cards to car payments.

Investing is going to be a rollercoaster

Markets do not like uncertainty. A troubled future repeats itself

volatility

and investors prefer clear prospects.

No wonder Friday’s inflation report sparked a sell-off on Wall Street. The higher-than-expected figure confirmed many investors’ biggest fear: that the Fed will have to slow the economy even faster if it wants to get inflation under control.

This process will begin in earnest on June 15, when the central bank unveils its latest policy decision. Still, uncertainty surrounding the path of inflation, future Fed actions and whether policymakers will slow the economy too much will weigh on markets for months. Brokerage accounts and balances of 401,000 are already well off their 2021 highs. As the Fed steps up, inventory moves will likely get even frothier.

Stocks also fare better when interest rates are low, as alternatives like Treasuries don’t offer the same allure in a low rate environment. As the Fed acts, many names that flourished when rates were near zero will come under renewed scrutiny.

Riskier assets could face an even bigger drop. Cryptocurrencies also fell broadly on Friday, pushing valuations even further from their 2021 highs. As investors prioritize safe-haven assets and brace for slower economic growth, they are likely to pull back money from crypto and other uncertain markets.

Mortgages, car loans and credit card debt will become much more expensive

The Fed’s benchmark rate affects borrowing costs across the economy. With inflation reaching new heights, interest rates on all kinds of commodities are about to soar.

For one thing, potential buyers hoping to take a break will be out of luck. The housing market was virtually inaccessible for much of the pandemic as bidding wars and a nationwide shortage of inventory drove prices up at a historic rate.

The Fed is ready to cool this rally with its rate hikes, but that doesn’t mean homes will be affordable. The average rate on a 30-year fixed-rate home loan is up more than 2 percentage points compared to the end of 2021. For potential buyers, this means that financing a purchase will be much more expensive.

Auto loans will show a similar trend. Since most vehicles are purchased with financing plans, rate increases will translate directly into higher rates for auto purchases.

Even credit card debt will be harder to pay off. The average card rate sits at around 16.4% and could hit a new all-time high above 18%, according to Ted Rossman, senior industry analyst at Bankrate. Paying off a balance could then take longer and cost more in interest, especially for those who only make minimum payments on their credit cards.

A recession becomes more likely

Rising consumer costs are one thing, but the biggest fear in economic circles is that the Fed is stuck. Doing too little to counter inflation could allow price growth to accelerate further. Current inflation could even become permanent if long-term inflation expectations increase.

Conversely, acting too aggressively could slow economic growth to a halt. Demand could evaporate, leaving businesses with reduced revenues. That would trigger layoffs and quickly undo much of the pandemic-era recovery.

Fed Chairman Jerome Powell has indicated that the Fed will prioritize cooling inflation over a recovery in the labor market. Getting inflation down is “essential” and the Fed “cannot let inflation expectations become unanchored,” Powell said at a May 4 news conference.

Whether the Fed can pull off a so-called “soft landing,” in which inflation slows and unemployment stays low, has been the subject of intense debate for months. May’s inflation reading, however, narrows the target the Fed is trying to achieve. The central bank must now rein in demand even more forcefully, which comes with some risk of recession.

“The Fed’s resolve on price stability is going to be really tested now,” said Seema Shah, chief strategist at Principal Global Investors. “Key rate hikes will have to be relentlessly aggressive until inflation finally starts to subside, even if the economy is struggling.”