7 Warning Signs of a Looming Recession


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Rising Inflation
When inflation heats up too quickly, it forces the Federal Reserve to cool the economy down by raising interest rates. RapidEye/Getty Images

Like wage growth, some level of inflation is a good thing. It means that unemployment is low, workers are being paid well and they are out spending their money. As demand for consumer goods increases, so do retail prices, which is what drives inflation.

But when inflation heats up too quickly, it forces the Federal Reserve to cool the economy down by raising interest rates. The danger of raising interest rates is that it makes borrowing more expensive. And if companies are already nervous about an upcoming recession, they'll be even less likely to borrow and invest in new equipment and new hires if interest rates are high.

If the Fed plays its cards right, it can keep inflation at manageable levels — 2 percent is the target — without raising interest rates so high that they choke off economic growth. The timing of those rate increases is the key. If the Fed guesses wrong and raises rates right as the economy begins to sputter, it could accelerate an economic meltdown.