Dennis' Mortgage Blog

If economic data came out that showed growing inflation for consumers as the economy was growing and jobs were being filled and unemployment was dropping it would be of a mild concern.  Certainly nobody likes to pay more for goods and services, but if incomes are rising at or faster than the rate of increase in your spending for clothes, fuel, food and entertainment you concern is mitigated by your higher take home pay.

If however economic data came out that showed growing inflation for consumers as the economy was not growing, and possibly shrinking, and the number of unemployed was increasing it would be of tremendous concern.  Not only are you paying more for clothes, fuel and food, you are doing so with a smaller paycheck due to slow downs at work, reduced overtime, bonuses and hours.  Forget about even paying for entertainment, you are concerned with paying more for shoes for your children next month.

Today the Labor Department released the Consumer Price Index (CPI) for August.  There are two components to every CPI data release, the CPI number which includes a broad basket of goods of food, clothing, housing, energy and the "core CPI" which is the same basket of goods without food and energy.  The core CPI strips out food and energy because those prices are more volatile and can spike or dip CPI depending on short term weather, politics or other events. 

The base CPI for August 2011 showed an increase of 0.4% in August and the core rate rose 0.2% and reached a twelve month increase of 2.0 for the first time since the 4th Quarter of 2008.  This increase in prices has an effect of deteriorating the wages of workers, if you take home the same pay but have to pay more for basic goods it is essentially the same as taking home less money. The increase in prices in August resulted in a 0.6% decrease in average hourly wages adjusted for inflation, the biggest one month decline in over three years.

Over the past twelve months the CPI has risen 3.8%, ten months ago CPI showed a 1.1% increase.  Over the past twelve months energy prices have jumped 18.4%, dragging other commodity prices up and cutting into consumer spending for other goods and services as we need more money to fill up the tank to get work or the kids to school.  In areas of the country where home furnaces fire up in October and stay on through February or March, the higher costs to heat homes will have a big impact on consumer spending through the 4th Quarter of 2011 and the 1st Quarter of 2012.  Food prices have increased 4.6% over the past year, another staple we must purchase.

Yesterday it was reported that retail sales in August 2011 were flat despite estimates that retail sales would increase over July as back to school spending was underway.  Rising prices, concerns over the economy and job security kept pocketbooks shut for the month.  With consumer spending approximately 70% of our economy, having consumers reducing their spending and consumption leads to slower economic growth, job creation, etc.

Part I of Thursday's economic news higher prices for consumers, especially for essentials like food and energy that cut into our ability to spend on other items such as clothing, entertainment or even maintenance of our homes and automobiles.

Part II of Thursday's economic news was that 428,000 individuals filed for unemployment insurance for the first time, the highest number of weekly filings for first time recipients since June.  The average number of claims for the past four weeks was 419,500.  Over the past three months only 105,000 jobs have been added to the U.S. economy.

Stagflation is defined as rising prices in a shrinking economy.  While there has been no formal declaration that our economy has slipped back into recession, rising consumer prices, increasing unemployment and no growth in the economy has all the signs of stagflation.

If this is the case it is the hardest economic condition to reverse.  The Federal Reserve may announce new measures to try to spur economic growth, which would amount to more money being put into the economy and lower interest rates, but these measures serve to increase inflation which cuts into salaries which lowers consumer spending which prevents economic growth. 

In speaking with the economic condition we find ourselves in with John Willett of Willett Financial Services I asked, "what investment works during stagflation? Cash values are eroded as are fixed income investments."  He replied, "investments that return income."  I.e. those that pay dividends.

I replied the best dividend for most of us during a time like this is the paying down and elimination of debt and debt payments; often our best rate of return is not what we are earning on investments but what we are saving on debt. He concurred.

With rates where they are call me to see how you can lower your monthly debt payments, restructure your overall debt and/or pay off your home faster leveraging historically low mortgage rates.  Stagflation could lead to higher prices and higher mortgage rates, don't get caught missing the low rates now available.