July 22, 2014 Real Estate Report - Do You Remember Inflation?

While some may consider this a sarcastic question...we have not had really high inflation in the United States for some time. For example, in the past twenty years the retail inflation rate has averaged approximately 2.25% with an even lower number for the past decade. Two points about this. First, even low inflation rates can cause increases in the cost of living. For example, a 2.25% inflation rate over 20 years will increase the cost of living over 50%. Secondly, though low inflation rates can create issues in the long run, those who are older remember a U.S. inflation rate of near 10% per year from the period of 1973 to 1982. That was real "old fashion" inflation. So if raging inflation has not been a problem for ten years, why bring it up now? Because the real reason we have had really, really low interest rates for the past ten years is the lack of inflation we have experienced. And if we really want to know when rates are going to go up significantly, we need to watch the data on inflation more closely. The reason rates trend up when we get good economic news is the fact that the markets feel that the Federal Reserve Board will raise short-term rates in response to the threat of inflation. There are actually two stages here. The Fed has kept short-term rates near zero in response to our deep financial crisis and lackluster recovery. So the first move is to move rates to a low inflation normal. The second move is the one we should worry about in the long-term. That is a move to head off inflationary expectations if the economy heats up. We expect the first move and should worry about the second move. For right now the sale on money to finance cars, houses and investments continues. If we keep creating jobs, we should keep a wary eye on the inflation number because we know the Fed is doing just that when they meet next week. Keith Stewart 773-529-7000