When we talk about inflation in the economy, the cost of oil and high prices at the gas pump is a superb example. Of course, mortgage rates and the housing market are affected. Not to mention the price of goods surging at the grocery checkout. Simply put, inflation occurs when the amount of money in our wallets stops affording our current lifestyles.
Inflation hits hard when American salaries, which previously covered monthly expenses fall short. Specifically, as the price level of every good sold increases beyond current wage earnings, inflation packs a punch. Let’s begin with navigating the causes and effects of inflation, exploring the past, and assessing past and present measures to alleviate the financial burden of inflation for Americans.
What causes inflation in the economy?
One leading cause of economic inflation is supply and demand. Increasing demand or need for a product rapidly pushes businesses to accelerate production. As this happens, higher wages and new hires span across large sectors and within multiple industries. Commonly, wage increases then spike higher consumer spending, further increasing aggregate demand (the total demand for goods produced domestically).
The consequence of uncontrolled aggregate demand is the risk of shortages of goods, products, and services. Given these points, businesses increase costs when goods are in high order. In turn, they gain revenue and slow demand, ultimately securing price stability. The long-term effect of uncontrolled consumer spending is inflation.
How do we measure inflation?
The consumer price index (CPI) measures the cost of living versus the cost of goods. When the CPI increases, wages are typically adjusted to offset the price of consumable goods. The following data we collect is personal consumption expenditures (PCE). In essence, PCE measures all consumer spending for all goods and services sold to the households of the American people. In a nutshell, CPI and PCE provide the data to measure the sustainability and efficiency of the U.S. dollar for the people.
Additionally, we measure a country’s gross domestic product (GDP) to determine stability. We do this by taking a comprehensive measure of the final goods and services produced in that country without double counting the intermediate goods and services used to make them.
“To measure the GDP of a country, we use this equation: the total consumer spending (C) plus business investment (I) and government spending (G), plus net exports, which is total exports minus total imports (X – M).” –Investopedia.
Analysts study any “basket of goods” or services households consume to measure inflationary fluctuation (referred to as a price index). To calculate the rate of inflation, or percentage change, each basket or service incurs over time. These measurements are then analyzed monthly and, ultimately, yearly to determine monthly and annual inflation rates. Statistical analysts use these metrics to define core inflation rates and measure economic growth. How does this data help? This measure of inflation helps determine a subset of consumer prices that excludes food and energy prices, which rise and fall more than other prices in the short term.
Understanding the different types of inflation in the economy.
Periodically, inflation occurs because of cost-push inflation. When the rise of supply-chain materials grows beyond profitability, businesses raise prices for their customers or face product disruptions for all. Higher grain, feed, and fuel costs drive pricing in the farming industry. Often forcing farmers to raise the price of milk, meat, and many other items.
In contrast, you have demand-pull inflation. Demand-pull inflation occurs when the demand for a product exceeds production capacity. As a result, the maker of that product raises the price to slow consumers down. Often, businesses capitalize by hiking prices for profit from the spike in demand. For example, we previously discussed oil prices and the cost of fuel. Since oil is an input for thousands of consumer products, the implications of a surge are monumental. Fuel spikes drive the cost of medications, eyeglasses, and even toothpaste. In 2022, OPEC Plus announced that it is restricting oil output. Consequently, the longer America endures inflation, the harder it will affect economic activity worldwide.
The concern is that price inflation remains because OPEC Plus continues to withhold. Consequently, oil barrel costs continue to rise uncontrolled. “They are adding pressure to a hot-button issue for consumers worldwide. The development comes as a blow for inflation,” Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said in a note Monday. “Markets are aware that if the pressure continues, central banks will need to extend or strengthen their interest rate hiking cycles.”
Interest rate hiking cycles and how they can help.
What exactly does the Federal Reserve do? In a nutshell, the Federal Reserve manages our monetary policy and regulates the U.S. financial system by controlling the money supply in the economy. To break it down, the Federal Reserve sets our interest rates. Most recently, it has spent trillions of dollars in asset purchases to boost the overall financial markets in America.
You may remember the global financial crisis in 2007. To combat inflation in the economy, the Federal Reserve Bank and America’s banking institutions decided to lower interest rates. Holding interest low salvages the economy keeps Americans in their homes, and feeds their families. In some situations, despite inflation in the economy, homebuying is beneficial. When interest rates are low, they prevent financial deflation, and loans are abundant. They also provide financial liquidity, allowing businesses to operate and function during economic hardship.
Who benefits from inflation in the economy?
Unquestionably, those who have historically benefited from inflation are the collectors and investors of the world. When the world struggles, owning a portfolio of collectibles and goods provides leverage. In tough times, the consumer demand for these items will be high. Those lucky enough to own fine art, coins, wine, collectible cards, and even real estate can stand to make a pretty penny when they buy the items with cheap money. In short, seasoned investors understand that over time the dollar will lose and gain its purchasing power. Fittingly, inflationary influx and market volatility are part of the gamble for many collectors and investors, especially in the real estate market.
Who does inflation hurt the most?
Unsurprisingly, low-income households are hit the hardest by inflation. Most low-income families spend much of their monthly income on household essentials and health care, so there is very little left at the end of their paychecks for savings and future planning. Low-income families are often forced out of work due to the rising cost of services and goods such as diapers, childcare, and feeding their children. In the long term, unemployment rates among low-income earners in an inflated economy will rise.
The Consumer Price Index (CPI) measures price change (or inflation) consumers face. The best-known index, the CPI-U, depicts the inflation experience of all urban consumers. “From 2005 through 2020, prices of many of the goods and services that had larger budget shares for lower-income households rose faster than all other items. Prices for motor fuel, medical care, fuel, utilities, and shelter rose faster than the overall average of about 2.0 percent per year. Because the lowest income households dedicate more of their spending on these categories, their overall inflation rates grew faster than highest income households.” -U.S. Bureau of Labor Statistics.
Is high inflation in the economy good or bad?
To effectively answer this question, let’s refer to the Goldilocks adage that we are looking for the “just right” economic temperature. While an extensive period of time with high inflation affects our economy negatively, too little inflation can also negatively impact us. To illustrate, high inflation often erodes the purchasing power of saving money because everything is so much more expensive now than it would have been when you started saving. Therefore, generally, economists advocate for a middle ground of a low to moderate inflation target of around 2% per year.
Why is inflation so high right now?
Overall, inflation in the economy is problematic for policymakers, the supply chain, and our national economy. Although there is no single reason for this economic phenomenon, several instigating factors exist. Numerous events seem to be the root cause of inflation when linked together. Some of these events are:
- The COVID-19 pandemic caused worldwide panic and death rates.
- Shortage of consumer goods from port shutdown and warehouse closures.
- The unprovoked war on Ukraine caused trade sanctions and reduced worldwide oil availability.
- Due to the war, tariffs limited the exportation of Ukraine’s grain harvest, increasing food prices.
- The bounce back from vaccines caused a spending frenzy.
- Low interest rates quickly outpaced housing supply and increased home prices.
- Stimulus checks, increased unemployment benefits, and loans were issued. Consequently, Americans started buying again in mass numbers, causing a massive demand without warning.
How does an economy bounce back?
Ultimately, an economy won’t “bounce” back if we are all lucky. Naturally, the best and most beneficial outcome is that we slowly and steadily keep moving forward. As a society, we need to keep feeding the economy while at the same time resisting the urge to hoard and splurge. After all, that is basically what caused the problem initially.
One thing to consider is that our country and the world have experienced higher highs and lower lows. We have endured World War I and World War II. We are experiencing inflation in the economy that is slowly leveling and beginning to show promise. By taking inventory of the events leading up to this inflation hike, the key takeaway is that we need to fuel our economy and practice restraint.
Can I still buy a home with high inflation in the economy?
Homebuying is ideal for financially savvy buyers with down payment funds and proof of financial responsibility. Real estate prices are decreasing, and lenders are willing to work with buyers. One consideration is that even if the interest rate is slightly higher today, the overall ticket price on the property is low. In truth, once the interest rate drops, these buyers will have a substantial equity opportunity to refinance and get into a rate that suits them for the life of the loan.
Remember to check down payment assistance (DPA) eligibility. DPA is a home-buying program that gives eligible buyers cash grants, low-rate loans, and tax incentives. The bottom line is that with proper planning and responsible spending, our economy will recover and be stronger on the other side, and there are always opportunities for buying a home, even with high inflation and higher mortgage rates.
When inflation isn’t kept in check, it’s commonly known as hyperinflation or stagflation. These terms describe out-of-control inflation that cripples consumers’ purchasing power – Forbes.
Homebuying Despite Inflation in the Economy, Who Can Help?
Purchasing property is a significant factor in financial security. So, regarding mortgage loans, responsible decision-making is crucial. Undoubtedly, the loan process invokes insecurity in many people. In particular, navigating through a sea of paperwork and financial jargon can be unsettling without honest guidance. In fact, a lack of clarity can lead you down the wrong path and compromise your financial future.
Mortgage Insiders help countless homebuyers find solutions to inflation in the economy and reach their goals to create stronger financial futures. You deserve to work with a lender who brings clarity and has your best interest at heart. Becoming a homeowner is exciting. Alternatively, confidence grows through knowledge. Whether you’re looking to purchase a home or need help refinancing to lower interest rates, hiring loan experts is essential to investment certainty.
The Steps are Simple:
- Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.
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- Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
