How Inflation and Employment Impact Mortgage Rates

July 25, 2022

Inflation iscaused by too much money chasing too few goods and services, demand exceeds supply, whether in the summer of 2022 or two thousand years ago. This can be aresult of lack of supply, or an abundance of money from high employment levels. But how does this impact the rates your borrowers are seeing when financing a home?

The pandemic created a reduction in supply of many goods used by consumers and manufacturers. The “supply chain” issue we have been reading and hearing about for almost a year have been caused by manufacturing shutdowns or slowdowns, a lack of workers either due to government mandates, or employees out with the virus, or employees leaving work to receive government benefits, reduced supplies needed to produce consumer goods.

 

As a result, prices began to climb. Automobiles and durable consumer goods were the most noticeable sectors to see large increase in prices as supplies were low due to a lack of computer chips being manufactured. As we came out of the pandemic and employment grew, more people receiving paychecks entered the marketplace to purchase goods and services.

The Federal Reserve called the early stages of our current inflationary era “transitory.” But investors and many economic analysts believed otherwise. Investors voted with their dollars and stopped purchasing U.S. Treasuries, mortgage-backed securities, and other fixed rate investments, causing rates to climb. As inflation began to grow, many investors saw the amount of money in the economy from the Federal Reserve and federal and state governments, increasing employment as workers returned to their jobs, most notably the very large leisure and hospitality sector, and continuing lack of necessary supply to keep prices in check.

 

High inflation with a strong labor market creates a spiral that is hard to break. Employers must pay higher wages to attract workers, are paying more for the goods they sell to consumers, and must therefore charge consumers more for the goods they sell. Consumers, paying more for their goods and services, demand higher paying jobs to afford their standard of living. Underlying all of the price increases for consumers and businesses, is the price of energy needed to run equipment, transportation, and to heat and cool buildings.

The spiral is broken when prices and/or employment slow their growth, or decline. It is rare that once prices increase that they drop, even more so drop to the levels before an inflation cycle. What is not so rare is that employment shrinks, unemployment rises, as an economy cools.

 

The target for inflation that is acceptable to enable steady, but not too robust, economic growth and stable employment markets is around 2%; this is also the target for stable interest rates. In June the Consumer Price Index showed an annual rate of inflation of 9.1 percent. Orion’s brokers know that the Fed has its work cutout for itself as we move through the summer.


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