Inflation data continues to be encouraging.

By now, you’re likely aware that inflation is the biggest challenge in the economy today.  What is inflation?  How did we get here?  Why does any of this matter?  What’s the Federal Reserve doing about it? 

In this edition, we’ll explore what led us here, but more importantly, we’ll explore the path out of this inflationary concern.  That is important because until inflation is under control, it’s not reasonable to expect any markets (housing, in our case) to function in “normal” ways.

Just a quick reminder:  These articles I share here are researched and written by me!  As part of my commitment to ongoing support for my clients and partners, I write these articles to help them understand what’s really happening in the markets, beyond the headlines and soundbites.

What even IS inflation?

Simply put, inflation is a rise in prices, or conversely, a decrease in purchasing power.  In our current situation, it’s borne out of an imbalance between supply and demand.  It’s important to understand the forces on both sides – Supply and demand.

How we got here – The supply side

During the COVID-19 pandemic, productivity declined for many reasons:  Some workers got sick with COVID and took time off.  Others got sick and passed away and never returned to the workforce, and several businesses and factories shut down altogether.  The result?  Fewer goods available for sale.   Add to this supply chain woes, which meant skyrocketing prices to get a shipping container across the ocean.  The combined result?  Fewer goods for sale and increased production costs.

How we got here – The demand side

And that’s just one end of the candle, which was being burned at both ends.  The other end of the candle is demand.  The government’s response to the pandemic was to flood the system with money:  At the consumer level, the government issued stimulus checks to some people.  At the highest level, the Federal Reserve (FED) injected funds into the system to help maintain the flow of credit to keep businesses running.

To summarize:  Supply down (and costs up) due to COVID & supply chain issues, while demand went up due to stimulus money flooding the economy.

Why is this a problem? 

If inflation is left unchecked, it will continue, and prospect of long-term unchecked price increase is a problem for all of us.  Have you seen the price of a dozen eggs lately?!

So what is the FED’s plan? 

To slow down the economy, one lever the FED pulls on is interest rates.  By increasing the Federal Funds Rate (the rate at which banks lend money to one another – not directly correlated to your fixed mortgage interest rate), they can increase the cost doing business.  An increase to the cost of doing business results in higher prices for the consumer, and as prices increase, demand generally decreases.

So how is the FED’s plan working?

The FED started raising rates back in March of 2022, with the hope of seeing the growth of the Consumer Price Index (CPI) slow compared to the prior year.  Since June of this year, the CPI has declined each month from the prior year.  This tells us that prices are on their way back down — Great news!  The financial markets have also responded well to the trend of declining CPI numbers.  In fact, mortgage interest rates are down over 1.25% from their height in September.  We are headed in the right direction!

What’s next?

We’re not out of the woods yet.  In their own press releases, the FED has stated their target CPI is 2% – November’s number was 7.1%.  We’ve got a way to go, but there is good reason to believe we’ll gain momentum in coming months with further reduced CPI.  This is important because the sooner we get towards their target of 2%, the sooner they’ll take their foot off the neck of the economy in the form of rate hikes, and the sooner the housing market will normalize.

If you found this interesting or helpful, please feel free to share it with a friend, family member, or co-worker – it’s my goal to educate & empower as many people as possible during this unique time in housing!

If you have any questions about what you’ve read here, your situation, or about the market in general, please reach out!  We are here to help however we can!