A LOOK AT SOME CURRENT SOURCES OF INFLATION

The economy is giving signs of a growing gap between the supply of things and the demand for those things. Just as we were seeing the supply chain start to get working again, we have the Ukraine Soviet War interrupting critical sources of raw materials and food for much of the world.  Thus, demand is still greater than supply. 

The following market measures provide insight into some sources of our inflation.

EMPLOYMENT

Workers are the economy’s primary resource. With the unemployment rate approaching record lows, it’s easy to see why payroll costs are rising faster than inflation. We just don’t have the workers to fill the jobs.  As producers pay more for labor, they bake the added cost into the product’s price. That’s cost-push inflation. Add in heavy demand (demand-pull inflation) and we have two forces pushing our inflation.

GDP GROWTH

For all of 2021 (last reading), our Gross Domestic Product (GDP) rose 5.7%. Take out the anemic 2Q2021results, and the rate would be close to 6.6%. That bounce back from the lockdown, incredible as it is, is even more incredible given that it required a restart of our economy. Yet, Final Demand is not satisfied.

Consumers continue to buy, although lately with elevated price consciousness.

HOUSING (Which wraps Inflation, Interest Rates, Demand & the Fed in One Market)

Price is the cost of a house. The interest rate (IR) is the cost of the money you borrow to buy the house. Inflation is prices going up, and recently going up at record rates. The Fed is the central bank, and they adjust IRs higher in response to inflation.

All those forces come together in the housing market. At the start of 2021, the 30-year mortgage was at 2.68% and the median US home price was $299,776. In February 2022, the median home price is up to $400,600. The 30-year rate is now bumping 5.00%. 

The 33.6% increase in home prices in only 13 months results from extraordinarily high demand. The IR is up 86.57% in that same period. 

The Fed first raised IRs in March 2022 to begin their inflation-fighting tightening. But IRs on 30-year mortgages were already rising by 3Q2021 based on demand in the market. With tightening, they’re going higher.  Houses will be too expensive for many potential buyers and as they drop out of the market, demand cools off and prices will stop rising so rapidly. Maybe even fall.