He Said A Bad Word

Circle of Life

“Inflation.” There, I said it. And I’m proud and I’ll say it again. Inflation. The thing that first comes to mind is the late 1970’s. Even if you weren’t alive, any lessons you’ve heard training you that inflation is bad mentioned the 1970’s. Of course that’s not the worst inflation ever, but it seems the occurrence that people can most identify with.

There’s no shortage of stories of double, triple, quadruple percent inflation. But generally it was war, or a downward spiral of a ruling regime, or a time that people try their hardest to forget. But not the 1970’s. That was just painful. Wages not keeping up with prices. Job demand not keeping up with prices. It seemed as if nothing could keep up with prices. And then it was squashed! In 1980, the Fed Funds rate reached 20%. That solved that problem. It brought on others, of course, but that’s for another blog.

By 1980, inflation was running at approximately 14%. Think about that. Prices were increasing on average at 14% a year at the peak. I can still remember the equation that money will double in 7 years at a 10% compounded interest rate. What we’re talking about here is prices doubling in under 5 years at that rate. When was the last time that your salary doubled in under 5 years for the same job? That was rhetorical. To anyone that was able to answer, we all want your job.

So that brings us to now. We’ve enjoyed extremely low interest rates for a while now. Enjoyed may not be the most accurate description for many, as these low rates are a result of the “Great Recession.” Low rates have been kept in place as people crawled out of the financial depths that many reached and have gotten back to the more normal existence of working, paying bills, and not being too stressed about losing the house to enjoy other things.

But like so many other things, we get used to it. We think it’s a “new normal” or something. But it isn’t. It’s a part of a larger cycle. The duration of these cycles is always difficult to predict, but still there are cycles. Economic cycles include low interest rates, high interest rates, and rates in between on the way up and on the way down. And when those rates start going up, it’s usually because the economy is expanding. Business is growing. Wages go up. Jobs are created. It’s…wait for it…Inflation!

Doesn’t sound so bad does it? It’s the other part of the cycle. And it has arrived. There’s been a bit of a rumble, but like so many cycle changes (think the recent winter to spring shift), it will come upon you all at once before you realize what’s happening. So how do we realize it’s happening? It’s evident in more and more ways recently, and there’s nothing we want to do about it.

As we’ve all read, the job market has picked up. For a while, it was easy to make the argument that we still weren’t accounting for all those people that had given up. But even those people are coming back. The lower end of the job market has become extremely tight. Part of this is no doubt an unintended consequence of our recent immigration stance. Part of it is the move toward higher minimum wages, and the ability for others to feel empowered to hold out for more. The number of small factors that can ripple out and impact this part of the labor force are quite large. And it goes in waves…

As to food, that staple we can’t give up, I would guess we’ll all start feeling that a bit more. I’ve been told by a friend who has successfully opened and owned numerous restaurants that his food costs are going up. So, it’s going to cost more to eat out. Of course, this will also translate into it costing more to eat in. And speaking of eating in, let’s talk about the ‘in’ part. Housing. Mortgages.

There is no doubt that this is where inflation will be felt quickly and impact a great many decisions. When interest rates jump, the housing market can experience a couple of things. One thing we’ll see this time is the rush to buy. That comfortable feeling of low interest rates has made the housing decision easier for many as they felt they could wait. The time wasn’t quite right, or the right house just hadn’t come along. Can’t wait now.

When rates jump, so do people. They jump into home ownership a bit sooner than they planned. They jump into a house that doesn’t quite check all the boxes, but it’s close enough. And get ready. Because this most impactful of inflation traits, mortgage rates, is about to grab you. In the last week, 30 year mortgage rates jumped 15 basis points (https://www.bankrate.com/mortgages/analysis/). That’s a lot. The warnings are that they will continue to accelerate. And this is during a period of low supply. That’s surely inflationary…

Obviously, inflation out of hand is definitely a bad thing. But the opposite can be as well. Japan has a recent 20 year history of low to negative rates that they would have happily traded for some expansion. Cycles go to extremes, and extremes are usually bad. But the up and down slopes themselves are not necessarily bad, or good. They are necessary. They make it a cycle. So now we’re in the inflationary cycle. But remember, it’s happening because people are getting jobs. They’re getting raises. Business is expanding. So while we don’t like paying higher prices or higher interest rates to buy a house or a car, we do like getting raises and having the opportunity to find a better job. And no matter how much we might want to hold on to the past of buying a house at under 5%, we need to let go. We need to embrace what’s ahead. It’s part of the cycle. As Mufasa said to Simba, “It’s the circle of life.” He just didn’t realize was talking economics.

*My recent sabbatical from writing my blog had a number of reasons. I’m looking forward to going back to more regular updates.