Inflation Is Here To Stay! (or not)
After telling us that inflation was transitory or temporary for months in 2021, many if not most economists changed their tune and declared that inflation was here to stay.
This is why the Fed changed course so quickly and aggressively this year, and it is largely why interest rates shot up to levels that are 3% HIGHER than 2020’s lows.
Even one of my favorite podcast hosts, Erik Townsend of MacroVoices, has been saying for months that we are in the beginning stages of what will be a long period (years) of structural inflation.
Many Signs That Inflation Is Waning
There are, however, many signs that inflation is already on the wane (or at least that it may have peaked).
- OIL PRICES. Oil spiked to over $120 per barrel in March, and analysts were predicting $200 oil in the near future. But, yesterday, oil dropped below $100 per barrel, surprising everyone.
- RENT. Bloomberg recently reported that the median national rent only rose 0.5% in June (way down from the 11.4% surge we’ve seen over the last 12 months), and 2-bedroom apartment rent actually FELL almost 3% in June!
- COMMODITIES. Copper, steel, lumber and other commodity prices have plummeted as well.
- LABOR. Barry Habib, of MBS Highway fame, reported today how job openings have been steadily trickling lower while unemployment claims have been trickling higher. This of course removes upward pressure on wages.
- TIPS (Treasury Inflation Protected Securities). These are bonds that the government sells that are supposed to protect investors from inflation, so their yields RISE with inflation expectations. But, yields have recently fallen to 2.6% from a high of 3.7% earlier this year. So, either those investors are all “dumb,” or the wisdom of the crowd is telling us that inflation has peaked.
- SUPPLY CHAINS/PORTS. There are reports everywhere that supply chains are untangling and that seaports are clearing up backlogs, despite concerns only a few months ago that the problems would persist for years.
- INVENTORY BUILDUPS. Retailers everywhere over-ordered last year when they feared supply chain issues would persist, and now warehouses are bursting at the seams – which can only result in price reductions in order to liquidate it. Both Target and Walmart alluded to this in their recent projections.
- WEALTH EFFECT. This is where consumers spend more as their asset values (stocks, crypto, real estate) rise because they feel wealthier, even if their incomes are not higher. With stocks, crypto and other asset prices, dropping like a rock, consumers will inevitably curb their spending.
- MONEY SUPPLY. Many people mistakenly believe, per Jeff Snider, that our current bout of inflation was caused by too much money printing. But Mr. Snider likes to remind us that bank lending creates most of our money and banks are not lending, so our overall money supply is actually way down. Government stimulus and excess demand in the face of COVID-related supply constraints fostered most of our inflation, per Mr. Snider.
To be sure, higher energy prices and higher wages will keep prices higher, and the food shortages will likely keep food prices higher as well.
BUT – the recent drop in many prices already caught analysts by surprise – proving once again that few “experts” have a clue of what is really going on in our economy.
It is also a reminder that predictions of doom and gloom are often over-stated.
Why Inflation Matters So Much
Inflation matters to us in the real estate and mortgage industries because it is one of the biggest single influences when it comes to interest rates.
So, waning inflation means lower rates and more housing affordability.
It also makes refinances into lower rates that much more likely – a great reminder for buyers who may be nervous or concerned about today’s higher rates.
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