5 Reasons You Will See Higher Inflation

Higher Mortgage Rates Are Just One Side Effect

It's not hard to realize how increasing inflation creates hurdles for many groups in our economy but there is no segment that it creates more havoc for than home buyers and sellers. 

As measures appear in the economy to coerce the Federal Reserve to raise interest rates, this blueprints a path of struggle for anyone trying to sell a home. While at first glance one might think rising home prices would give sellers a happy dance. But even though home prices rise so do mortgage rates. And with rising mortgage rates comes a reduced buying power of the home seeker. With less affordability comes less competition of qualified buyers. And the cost of your replacement home just got more expensive. Inflation rose the price of your home but also of the one you will seek after this sale. Even if you planned to downsize, that smaller replacement will be costlier in an inflationary time. 

The inflation effect for the buyer group is actually worse. Higher interest rates means the pool of affordable possible homes just got smaller due in most part to their reduced borrowing power. In plain speak, higher rates mean higher monthly mortgage costs. But inflation also increases the price of said homes. While sellers may sing at the idea of their home commanding a higher price, the buyer pays the price.

The Consumer Price Index is our yardstick for inflation. The CPI has been dormant for the past five years at around measly 1.3% per annum. There was modest price improvement last year but the most recent CPI inflation in February jumped to 2.1%. A recent article at Forbes, authored by Lawrence Yun, outlined the 5 reasons inflation is certainly on the rise. Here they are:

1. Employment Is Low

With unemployment around 5% and projected to go even lower, pressure with be on wages to increase and ultimately, prices. There is no recession on the radar so employment will continue it's strength. 

2. America Is Very Wealthy

A booming stock market, rising home prices and other factors have rocketed net worth of households to record levels. And not just for the super rich. Anyone with exposure to the market or real estate has seen financial improvement. Wealth improvement means increased consumer confidence and puts pressure on retail pricing, plain and simple.

3. Oil Prices Will Not Crash

Energy and prices have been rising at a double-digit rate over recent months and at the least prices will not recede anytime soon. Since there are no signs of a US or World recession, demand for energy will continue to be strong.

4. Home And Rent Prices Are Strong

There is a shortage of homes in the US due in part to the significant underproduction of housing over the last decade. And our shortage can't be fixed over night. Supply and demand is in play here, overtime.  

5. Consumer Spending Is Getting More Luxurious

The cost of electronic consumer products has fallen over 50% in the last decade. Smart phone, TV's and other products have become much more affordable to households. But American's aren't picking the basic models with better pricing but instead are opting for more high-end choices. And more often. Even though prices has sharply dropped for electronics household spending has actually increased due to created demand for the newest and greatest in products. 

Several other factors may also come into play. Trade restrictions will bring up the price of shoes, toys and other products from affected countries. Plentiful rain and good food harvests keep pricing stable but droughts will raise prices. Online retailers like Amazon continue to innovate distribution efficiencies. A national shortage of truck drivers is raising the cost of transportation. 

The five main reasons above will certainly push inflation up, perhaps around 3%. Now you just need to prepare for it to happen.




Scott C. Dickinson is a real estate broker and author that lives in Vancouver, WA. He can be reached at ScottYourBroker@gmail.com or www.scottdickinsonauthor.com. Follow him on Facebook at www.facebook.com/YourBrokerScott and Instagram at www.instagram.com/YourBrokerScott .