Inflation 2022: A new crisis worth your Attention!
Lately, there has been an upward trend in the prices of goods and services throughout America. Commodity prices and necessities charges are becoming inverted. It doesn’t take a fantastic capitalist or entrepreneur to see the fear in the market. With consumer credit and delinquencies reaching all-time highs plus the economic recovery from a worldwide pandemic, fears of a recession cannot be uncalled for.
When we hear the term recession, a sense of depression echoes for many. However, recessions at times have proved to be market fixers, adjusting the flow of capital through the economy and equalizing distribution for different economic activities. Yet, contrary to common belief, the idea of a recession–well at least for now, hoping the feds don’t change it– isn’t as bad when compared to a more inherent problem, inflation.
The idea of inflation has been cardinal for financial literacy; oftentimes, people hear interest rates and buying power being correlated to such. In fact, today’s mortgage rates and gas prices are quite some interesting examples of economic phenomena. The government can’t be discredited for not introducing contractionary monetary policies, but consumer behavior and politics have put quite a spin on it. A lot of you may be wondering: what causes inflation? Why should I be bothered? What should I do? Does inflation have any real bearing? I’ll try answering most of your questions throughout this piece by first looking at how inflation comes about and then diving into a popular example. Enjoy!
When approaching the idea of inflation, a multitude of factors come into play, one of which being demand-pull inflation, as evinced by recent events. Take events such as the convoluted patterns of the coronavirus pandemic, which caused price increases. Eating outside was replaced by grocery shopping, and instead of paying for services like gym memberships, money was spent on at-home exercise equipment, inventory that businesses sometimes lacked. Thus, certain prices frequently increased dramatically. With so much demand for an economy recovering from the devastating impact of COVID, demand-pull has been occurring steadily; though efforts have been revamped, issues such as car chip shortages remain persistent. Shifting concern from demand-pull inflation towards the inherent labor supply and support in the workforce, where population numbers have been hit, have left a dent on productivity outputs and pacing in the economy.
We can’t also deny the increased money supply within the economy. Usually, when the Federal Reserve proliferates the money supply from OMO’s, instances of money supply inflation can be seen. For example, pre-COVID M2 went from 14 trillion to 15.5 trillion in 2 years. And when COVID hit, M2 skyrocketed from 15.5 trillion in March 2020 to 22 trillion March 2022. This is almost a staggering 47% hike, and though such had been in the form of stimulus bills, regulatory practices, subsidies and more, the sheer circulation of such debt resulted in inflation of prices and the value of the dollar. Oftentimes, a large increase in money supply is followed by inflation in the next twelve to eighteen months; the same phenomenon is clearly occurring in today’s scenario, where people are astounded by prices and interest rates–not to dwell on the fact that the Fed increases the money supply by 40%
The money supply has been crucial to our economy. However, with moderation and time maturity, inflation can easily occur, which can be attributed to consumer spending habits, necessities and more. An influx of monetary currency must be accommodated with proper circulation in order for value to be sustained and to maintain a certain level of fiscal capability.
Apart from regulatory practices, the government has also attempted to diversify the markets and promote competitiveness throughout the economy. However, in such unprecedented times, there has been quite a lot of pressure placed on valuable metals and other commodities, which have become depleted and scarce for regular buying patterns, initiating another driving force of inflation: cost-push. As the name suggests, when the prices of materials increase, it signals a chain reaction to consumer and business managing expenses and spending sparingly. Rising wages of jobs throughout different industries, the low quantity of semiconductor chips and aluminum, are all examples of a scarcity in quantity forcing a hike in prices.
Cost-push inflation is equally pressing as demand-pull, as both result from the imbalances of supply and demand, two critical aspects of every economic class you might take. Even so, how do such simple concepts turn into bigger problems with even the pressing problem of a recession? Well, the matter can become far more complex from that. Let’s tackle the real estate market sentiments and conditions.
Prices in the housing market have been fluctuating; however, fears of a bubble on the brink of bursting are quite prevalent. Due to the higher mortgage rates, firms such as the ESR group and Keller Williams have lowered forecasts for single-family homes by 12–17%, respectively. By the same token, multi-family home units remain strong in trends with new constructions, especially as demand for rental units continues to persist from the single-family market’s unaffordability. The increased mortgage rates definitely indicate transitory inflation and tightening policies, however, an interesting aspect to also consider is how frequent refinancing has become, in fact, a sharp decline of 21.3% from 2020. The Federal Reserve’s forecasts indicated interest rates will be raised with policy held in the restrictive territory to constrain inflation. With the 30Y fixed rate mortgage soon approaching 7% and the 10Y rate within the touching distance of 4%, housing valuations look very stretched right now. Additionally, the median price for an existing home is 5.3 times the median level of household income, going to show how affordability is being stretched to its limit not to mention slow transaction times and fees.
As per the mortgage rates you can expect the Fed funds target range to 4.25–4.5% by year-end from the current 3–3.25% level. This evinced that the Federal Reserve has resulted in longer-dated Treasury yields moving sharply higher, which in turn has been the contributing factor for the 30Y fixed mortgage rate rising from below 3% in November 2021 to 6.52% in May 2022. The deadly combination of higher borrowing at higher interest rates means that the monthly payment on a new 30Y fixed-rate mortgage has risen rapidly.
Supply and demand are also being met thoroughly, to an extent for the housing market However, not all homeowners are currently selling their properties because of the bearish sentiment and sticking to the rate which they had secured. Conversely, housing starts and building permits are accelerating, hopefully diversifying real estate portfolios and allowing more retail buyers to join institutional investors. Currently, it’s a game of timing assessing the leverage that buyers and sellers have respectively, along with the Fed’s own role in shaping markets. Nonetheless, such hikes in rates accentuate the growing concern of a recession and a market crash.
Though the conditions of the housing market are becoming concerning, hard assets continue to prevail in times of inflation. There are a variety of methods to go about dealing with inflation, but the best approach is having a balance between keeping track of your personal finances and retaining the value of your money. This can be done from diversifying your investments between different asset classes (paper, hard, etc.) or even hedging inflation-resistant investments such as precious metals. Frequently, inflation outpaces annual raises, the main reason being why investing becomes so crucial. Will there ever be a period without any recessions? Obviously! However, economic phenomena such as inflation is a prime example that echoes the need to prepare and adjust your finances. As always, the best investment one can make is investing in themselves.
Consequently, I have tried walking through some glimpses of the causes of inflation, and hopefully, you were able to learn a little bit of background and a common example of such. Maybe some of you will start looking at the housing market, some might start looking at stocks and more, whilst others might just continue their regular activities. Either way, conducting your due diligence and researching is the best way to go about it, regardless of your approach.
