Inflation here? gas/grocery prices just continue to climb (3 Viewers)

[DaveXA]

I don't think we really want any deflation. I think what you want to see is inflation level off back to under 3%, and average wages increase to catch up with price inflation.

I'm not sure that's possible. Wages aren't growing at a rate that would replace the lost purchasing power. If wages do bump up enough to outpace inflation, then you'll see inflation trending higher again. I think some temporary deflation will be necessary to return to something close to equilibrium compared to the normal relationship in recent decades.

 

[DaveXA]

Just checked and it looks like wages have been increasing at about 4.5 to 5%, so about a 3-4% deficit. If that can hold while inflation goes back to target, then it would take 2 years for the average worker to catch up to where they were prior to this spike.

There are of course other indicators of financial health, of course, but that's a rough estimate.

Sure, but I suspect you'll see wage growth shrink as inflation shrinks as well. Certainly it won't be linear, but I don't see wages catching up in 2 years. Maybe 4 or 5 years if wages stays barely ahead. I guess we'll see, but I'm a little pessimistic that wages actually catches up.

 

[UncleTrvlingJim]

I'm not sure that's possible. Wages aren't growing at a rate that would replace the lost purchasing power. If wages do bump up enough to outpace inflation, then you'll see inflation trending higher again. I think some temporary deflation will be necessary to return to something close to equilibrium compared to the normal relationship in recent decades.

Deflation is almost always correlated with recessions, and that usually leads to higher unemployment and lower wages. Not that I think we should pretend that we can orchestrate this sort of thing perfectly (or even at all). Typically though it's much harder to see any sort of economic growth in deflationary environments, and companies typically cut wages then.

It's typically easier to maintain lower unemployment (which leads to wage growth) when there is inflation under the target (of 3%).

 

[UncleTrvlingJim]

Sure, but I suspect you'll see wage growth shrink as inflation shrinks as well. Certainly it won't be linear, but I don't see wages catching up in 2 years. Maybe 4 or 5 years if wages stays barely ahead. I guess we'll see, but I'm a little pessimistic that wages actually catches up.

Companies won't cut wages if unemployment stays low. The key to wage growth is low unemployment.

 

[DaveXA]

Companies won't cut wages if unemployment stays low. The key to wage growth is low unemployment.

True, I guess the question I have is will this low unemployment environment be sustainable for any extended period of time.

 

[UncleTrvlingJim]

True, I guess the question I have is will this low unemployment environment be sustainable for any extended period of time.

Good question and I assume there's a Nobel prize in it for us if we can accurately predict that sort of thing.

My guess is no, as the fed ramps up interest rates the economy will slow down - if it does, then unemployment will rise (which isn't a disaster necessarily, it's crazy low right now). That's if they gauge it just right - which seems unlikely. They are more likely to overtighten, causing a recession which will cause unemployment to rise faster.

The other dynamic is worker's savings - during the pandemic, with the stimulus and lack of things to do, worker's savings rates increased dramatically. This gives workers options to sit out if they don't find working conditions to their liking. This is overall a good thing, but can and has led to worker shortages, which of course contributes to supply chain disruptions which leads to inflation. However, higher interest rates and inflation will eat into savings quicker which will entice workers back into the labor pool, which leads to higher unemployment (unless the economy is growing fast enough to absorb those new workers - which seems unlikely if the fed is ramping up interest rates to combat inflation).

Lots and lots of moving pieces.

 

[UncleTrvlingJim]

again, on the plus side, inflation makes managing our national debt better (of course, that's until the higher interest payments catch up to us, and assuming our economy grows at a pace to keep up with inflation).

 

[DaveXA]

Good question and I assume there's a Nobel prize in it for us if we can accurately predict that sort of thing.

My guess is no, as the fed ramps up interest rates the economy will slow down - if it does, then unemployment will rise (which isn't a disaster necessarily, it's crazy low right now). That's if they gauge it just right - which seems unlikely. They are more likely to overtighten, causing a recession which will cause unemployment to rise faster.

The other dynamic is worker's savings - during the pandemic, with the stimulus and lack of things to do, worker's savings rates increased dramatically. This gives workers options to sit out if they don't find working conditions to their liking. This is overall a good thing, but can and has led to worker shortages, which of course contributes to supply chain disruptions which leads to inflation. However, higher interest rates and inflation will eat into savings quicker which will entice workers back into the labor pool, which leads to higher unemployment (unless the economy is growing fast enough to absorb those new workers - which seems unlikely if the fed is ramping up interest rates to combat inflation).

Lots and lots of moving pieces.

Agreed. Good thoughts.

 

[Mr. Sparkle]

this should accelerate the downturn - time is a flat circle....

Bloomberg - Are you a robot?

 

[DaveXA]

this should accelerate the downturn - time is a flat circle....

Bloomberg - Are you a robot?

Wow, I didn't realize there were that many out there. I'm glad I got mine at a fixed rate. Property taxes are still going up though, so that doesn't help.

 

[efil4stnias]

this should accelerate the downturn - time is a flat circle....

Bloomberg - Are you a robot?

Actually the article is mentioning the acceleration of ARMS to combat the inflation rates affecting fixed-rates for new home buyers.

I think its two-fold....obviously first, inflation management. but second is housing prices.

The problem isnt in near-term,,,its 5 years from now when inflation has been beaten back and borrowing rates drop back down...but the housing market has chilled ( supply more readily available, demand has shrunk ) ....and when that ARM borrower has to "re up" and realizes that for the past 5 years, not a single dime has gone to principal. So the original house purchase price IS EXACTLY SAME. Yet now that same home is appraising for 15-20% LESS.

Hope you got 20% to put down.

 

[UncleTrvlingJim]

So theoretically, if you believe that interest rates are only going to go up temporarily before going back down, and if you believe that home prices will not fall dramatically before your term is up, then an ARM is a logical choice to make. Those are two big assumptions, but not unreasonable.

Housing prices are driven by a large housing shortage, and it isn't likely to be alleviated in the next five years, so while they might fall some, there's a good chance that they won't fall that much.

However, this does introduce more risk into the system and from a policy level, we need to have a plan in place if it all falls apart again.

 

[saintmdterps]

Wow, I didn't realize there were that many out there. I'm glad I got mine at a fixed rate. Property taxes are still going up though, so that doesn't help.

Yeah I refinanced last year at 3.5% fixed and took out some equity. My mortgage is 923.00/month including escrows.

Then I put some of the equity into the stock market. I’ll be lucky to ever make that back. Down about 25%.

 

[efil4stnias]

So theoretically, if you believe that interest rates are only going to go up temporarily before going back down, and if you believe that home prices will not fall dramatically before your term is up, then an ARM is a logical choice to make. Those are two big assumptions, but not unreasonable.

Housing prices are driven by a large housing shortage, and it isn't likely to be alleviated in the next five years, so while they might fall some, there's a good chance that they won't fall that much.

However, this does introduce more risk into the system and from a policy level, we need to have a plan in place if it all falls apart again.

The problem as i see it, housing prices are SO inflated right now, that any one of a dozen factors could contribute to a sharp decline in housing prices. Supply, imo, being the main catalyst. If it costs $200/sq ft to build and $220/sq ft to buy existing today, you are rolling the dice that number will be same 5 years from now. ( supply being a) cost of materials to build and b) number of homes on market )

Crapshoot lol.

dont roll 7 on the come out. lol.

 

[efil4stnias]

Yeah I refinanced last year at 3.5% fixed and took out some equity. My mortgage is 923.00/month including escrows.

Then I put some of the equity into the stock market. I’ll be lucky to ever make that back. Down about 25%.

you will make it back...but it will be a few years.

Im literally treading water from DEc 2021 to current. Puts my "retirement target" off by about 2-3 years. Hopefully not. But i have another 15 years of work left so hoping for the best