The Big Inflation Gamble
Hello everyone. Welcome back to the Mortgage Rundown. Today we are going to talk about what’s happening in the capital markets.
Inflation is the word of 2021. We have all seen inflation this year in one form or another. Whether it's the price of gas, lumber, or housing, prices have climbed very quickly.
The big question is whether or not inflation is being managed correctly by the Federal Reserve, or is the economy overheating too much and the FOMC needs to remove some accommodation by raising interest rates?
To get a sense of the rise of inflation, take a look at the chart on your screen. It shows how much CPI has risen in the last few months to levels not seen in more than a decade.
If we look at the impact of the pandemic last year, it caused a lot of issues in several areas: most notably the supply chains that were completely shut down for several months. Whether it was manufacturing that came to a halt, home building that stopped despite a growing population, or just the lack of economic activity. At the same time, savings rates skyrocketed during the pandemic, which created a huge backlog of demand.
Now with the economy re-opening, all that money wants to go to work. And adding to that is all of the economic stimulus from the government which is creating tons of demand. But it’s at the same time that the supply chains are either broken or being rebuilt and they are now backed up. We have a situation today where demand is far outpacing supply and that is driving prices up.
So going back to the original question, the Federal Reserve is of the belief that the supply chains will return to normal capacity, and this demand surge we see today will level off, which ultimately will bring back inflation to normal levels. And it appears the market agrees with the Fed for now, but we will have to keep our eye on inflation data as it becomes available each month. Any unexpected ticks up in inflation could cause an overreaction by the market that the Fed needs to raise rates to slow things down a bit.
That's it everyone from the capital markets desk this week. Thank you all for watching and have a great day.