One of the more confusing aspects of the current economy can be summed up by the deviously complex question, “Is inflation rising?”
The Fed continues to assure us that inflation is, at most, a restrained force at the moment. Wall Street investors—unless they’re watching their investments in commodities gain steadily in value—would probably agree. The inflation numbers still seem light, though food costs worldwide have been increasing at a rapid pace and the cost of gasoline has probably been rising as fast at your local pump as it has at mine.
These, many economists argue, are temporary twists and bends in the usual course of price changes on the open market. Gasoline costs a lot more today, they note, because of fears about the market’s continuing ability to ship oil through potentially endangered places like the Suez Canal. Rising prices, therefore, are primarily the result of political problems, not the result of problems inherent to the fuels markets. People aren’t buying more or less oil, in other words; they’re just deeply worried about whether it will continue to make its way to market.
The same may be said for food, except the rising prices here are blamed on crop-diminishing weather problems and increasing import demand from the Far East and Middle East. It’s those Japanese, some argue, who have developed a taste for beef, ballooning the import of meats—among other things.
Economists note that these forces, which now push prices higher, could fade very quickly. They are neither permanent nor exactly inherent to the markets. Still, several facts need to be acknowledged:
1. It is currently costing people all over the world a good deal more to feed themselves. (But we drop the food price date from computations of core inflation because it is so unpredictably volatile.)
2. Shipping and costs of production have been jacked up by higher fuel prices (also left out of core inflation figures).
3. However, economists argue, labor markets are far from tight, and without the pressure of rising wages, inflation—as the economists understand it—is unlikely to really take hold.
4. Still, however we dance on philosophical pinheads here, the fact is that the basic costs of living ARE more expensive throughout the world, including right here in our hometowns. So, we may not agree that inflation has actually risen, but we have to agree that the costs of life have inflated in the past year. Hmmm.
5. Meanwhile, we all wait for the real estate market to recover…however that may end up looking. And here, the issues are muddied by the fact that real estate finance is only beginning to undergo complex and comprehensive changes. (Think, for example, of the likely demise of Fannie and Freddie, the rise in required down payments, higher mortgage rates, etc., etc.)
Until a few years ago, the threat of rising costs of living was muted by our confidence that we could cover our financial needs with our rising home values. If we got in trouble, we could just dip into our home’s equity.
Today, it ain’t necessarily so. Indeed, perhaps the majority of homeowners are still living with a negative equity. This being so, we would do well to treat rising inflation for what it is, the powerful enemy of our ability to pay the basic expenses of our lives. We can’t ignore these rising prices as we used to.
Further, it is politics and public pressures that are running the markets at this moment, not the usual market forces. Ignore these pressures at your peril.
BTW—Interest rates, some of which eased slightly last week, are likely to hold to their current levels for a few weeks, at the least. It may be a window of opportunity for those who want to take advantage of lower rates before they are gone.
by: Bill Fisher
