Rate Watch #1379 – Inflation
July 25, 2022
By Dick Lepre
A recap of last week's fundamentals is here.
“Man only likes to count his troubles; he doesn't calculate his happiness.” - Fyodor Dostoyevsky
For those of us who love low mortgage rates the greatest trouble is inflation.
The Fed traditionally prefers inflation of about 2%. The idea is that a little bit of inflation is good because it encourages people to buy now rather than later. High inflation makes things tough on those with fixed incomes. It discourages investing because it makes long term borrowing costs high. High inflation also means high mortgage rates which is not what folks reading this want.
The present situation is an odd set of things where prices are increasing for a diverse set of reasons. There in not one single cause or solution, rather each item (housing, fuel, lumber, and computer chips) needs to be addressed individually. Government regulations are, in part, the cause of these high prices and the last thing we need if more regulations. Regulations limit supply thus increasing prices.
Clearly the Fed missed the effect that the pandemic and the effects of sanctions post-Ukraine would have on prices. They also missed the effect that massively increased M2 money supply would have on prices.
he pandemic recession is different because 1) it resulted from something exogenous to the economy and 2) in 2020 the GDP part has corrected but the jobs part had not 3) now the opposite it true jobs are fine GDP is not.
Goods inflation vs. wage inflation.
While the prices of commodities go up and down wages are usually different. Wages tend to almost exclusively move up. However then last JOLTS report showed 11,254,000 Job Openings and the most recent report of those unemployed showed 5,912,465 people unemployed. So many Job Openings compared to people looking for work means higher wages.
Lumber prices suffered enormous increase as a consequence of the pandemic which reduced supply as lumber camps were close and were also affected by tariffs. Tariffs are almost always bad policy. High lumber prices increased the cost of building new homes. Lumber prices are starting to decline. Homebuilding had been low for 12 years and it is reasonable that producers of lumber were waiting to see if demand stayed high before increasing supply.
The basic cause of recent inflation is the inability of the supply side to react to changing perception of the effects of COVID on the demand side. This is a natural effect. The demand side can change at whim. The supply side needs time to be assured that demand will persist before it invests in increasing supply.
CrossCountry Mortgage, LLC
3236 Stone Valley Road W Suite 103
Alamo, CA 94507
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