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Mortgage interest rates are increasing and they’re increasing fast. But why? One factor is inflation.
I can give you a very simple illustration of the influence that inflation has on interest rates. Let’s say you loaned me some money. You loaned me $100,000. And I agree to pay you back with interest. Every month I make payments to you and you use that money to buy a list of goods and services. You get your nails done. You buy a new outfit, a handbag, and a new pair of shoes. And you’re able to get that whole list of goods and services with the money that I’m paying to you.
But over time, because of inflation, the prices on all of those things increase. So you have to start leaving things off your list. And as time goes on, there’s more and more that gets left off the list. Soon, your nails are all ragged. You can’t afford a new pair of shoes. Life is hell. Inflation is eroding the buying power that you have because of the fixed payment that you’re receiving from me.
So the next person that comes to you and asks to borrow $100,000, are you going to charge them the same rate of interest that you charged me? No. Because that payment isn’t worth as much now. You’re going to charge the next guy a higher rate of interest. So when inflation rises, it means interest rates rise too.
Now, how do we measure inflation? We look at something called the Consumer Price Index. We get this report every month for the previous month. So on April 12, we’ll get the CPI data for March. On May 11, we get the CPI data for April, and so forth.
And the way the CPI works is they give you an annual reading for the last 12 months. That’s what everybody looks at. They say the year-over-year inflation right now is 3.2% (or whatever that number is). In February, 2022, the CPI increased 7.8%, which is the largest increase since January, 1982.
And you’ll hear about something called the “core rate of inflation.” The core rate of inflation strips out food and energy.
Now why would they do that? People need food. People need energy. You look at the core rate of inflation because the Federal Reserve doesn’t have control over food and energy. While they are very influential, they only want to look at the indicators they can influence. If there is a war in Ukraine, it causes oil prices to spike. The Feds can cut rates, they can raise rates. That’s not going to get Putin to back off and go home.
If there is a terrible drought that affects crops and causes higher food prices, the Feds can raise and lower interest rates all they want, but they can’t control the weather. So the Feds look at the core rate of inflation because that’s what they can influence.
What factors will influence inflation in the coming months? Supply chains. Pandemic lockdowns saw consumers spending on everything from treadmills to jigsaw puzzles and supply chains have not been able to keep up. And every few weeks we’re hearing stories of another product in short supply.
Now is inflation always bad? Not necessarily. Because another factor that can influence inflation: Wage growth. If you have eaten in a restaurant lately, no doubt you have that restaurants are woefully understaffed. Every employer I’ve talked to is struggling to find workers, whether it’s an HR manager, a truck driver, or a bartender. Eventually, employers will have to increase wages. Now obviously, that’s a positive for workers. However it’s likely that it could keep inflation numbers high as companies cover their labor costs by charging consumers more for products and services.
So the bad news? Your restaurant meal is going to cost more. The good news? Your employer should pay you more so you’ll have more money to spend.
You can benefit when interest rates are rising. And you can win when the market is changing. We can show you how. My contact information is on my web site. You can also text me at 360-301-7575.
My name is Emily Caryl Ingram. I lead a team of Mortgage Loan Specialists at New American Funding in Port Townsend, WA.
