Update on inflation and rates

Question of the week: No question this week as we are travelling today, currently writing from Phoenix airport, as a result the WR&MU is abbreviated.

Have a question? Ask me!

Soars, spikes, jumps, climbs, pull out your Roget’s Thesaurus (more likely use an internet search engine) to find synonyms for “increases rapidly to describe consumer prices in May. The Consumer Price Index increased 0.6% in May from April, lower than April’s 0.8% leap, but still a very big jump in prices. The annual rate of inflation is 5%, the highest since 2008 when the economy was coming out of the Great Recession and surging oil prices pushed up costs globally.

Data bias is part of the increase, as measuring prices in May 2021 to May 2020 is skewed due to lower prices from many retailers of goods and services to retain business in the early months of the pandemic. “Part” may be attributed to the pandemic price slump. Most of the price increases are attributed to increasing demand as our economy opens up with most areas of the country fully open with no restrictions. A very large component of the jump in prices is supply-chain issues across a broad range of industries.

A factor not commented on in as many articles regarding May’s price jump is the higher cost of labor that is being built into prices by retailers of goods and services. The large amount of job openings across the economy has resulted in employers offering higher salaries and bonuses to attract workers. To ensure profitability these higher employment costs must flow through to prices paid by consumers.

“Don’t worry…” is the Federal Reserve, and many economists’ message regarding the surge in prices the last few months. Their reasoning is that the price increases are temporary due to the supply chain issues and sudden surge in demand, and that once the economy settles into “normalcy” inflation will cool back down to 2% by next year.

But 2% on top of 5% means prices will not drop, they will just increase at a slower rate. Some economists are skeptical of the 2% inflation rate expectation due to a wage-inflation push on prices that create a cycle of rising prices that is hard to break.

The news is not positive for rates, for two main reasons. First, the primary tool for slowing prices in an economy is higher interest rates. Rates will increase due to the expected need for higher rates. Second, the expectation that Congress will pass more legislation that will result in several trillion dollars above the pre-Covid budgets being pushed into the economy. This will greatly increase the amount of borrowing by the Treasury Department to fund the programs being funded. Increased borrowing leads to higher rates as the borrower, i.e., the Treasury, must increase rates to entice buyers to purchase the debt.

Rates for Friday June 11, 2021: As markets opened this morning prices on bonds and mortgages were dropping, which leads to higher rates, however at the moment rates are flat again from Friday to Friday. I am surprised that rates are where they are and my expectation was, is, they would be at least one-quarter of one percent (0.25%) higher than they are.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.75%  Flat

30 year high-balance conforming                   2.875%  Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Flying today for the first time since September 2019, and other than everyone in face masks everything is the same—full airports and planes. A good sign that America is getting closer and closer to our old normal.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog