Will Inflation Go Down?
There’s a lot of economic jargon being tossed around in headlines these days, and one of the hot topics out there is inflation. To start, it’s important to understand what inflation is. When the value of a currency diminishes, the result is inflation – basically, you get less for the same or more. The cost of goods and services increase, costing more money for the same (or worse, less) products or services. There are many causes of inflation, and it’s a pretty complicated economic phenomena that has caused hardship for many people, and in the worst cases of hyperinflation, has even destroyed currencies throughout history. The biggest question on many people’s minds today is ‘will inflation go down?’, often followed by ‘when?’.
Will Inflation Go Down?
Inflation is typically analyzed within 2 economic reports – the CPI (consumer price index) and PPI (producer price index). Both gauge inflation, but PPI excludes volatile energy and food prices. Each report is analyzed for month-over-month changes, and these month-over-month changes are added together over a 12 months cycle to determine an annual rate, which is usually the metric shared when discussing “inflation”. For example, if we started with 0% inflation, and each month for the next 12 months, there was a monthly increase of 1%, inflation at the end of that year would be 12%. This is important because current inflation is important, but it’s equally important to recall the months current readings are being compared to (each month replaces the same month’s reading from the previous year).
It’s important to understand how inflation is calculated to have an idea of when it may go down. For example, summer of 2021 saw a small dip in inflation, and with inflation currently on the higher end of the spectrum, lower 2021 numbers will likely be replaced by higher numbers for the same months in 2022, making it unlikely that inflation will see a dip this summer. However, because of the Fed’s rate hikes (an attempt to reign in inflation by making borrowing more expensive) and the fact that inflation was high in the fall months of 2021, it’s very possible we’ll see inflation numbers start to get some relief in the fall. You can see how inflation has ebbed and flowed in the chart below, so when you see inflation numbers in future months, you can see the month’s being replaced, too, to determine overall inflation.
This helps to answer the question “when” inflation might go down. Assuming the Fed can reign in some inflation with their rate hike plan, and also assuming supply chains begin to normalize, you can see above inflation numbers were at a recent low in July-August 2021, so while month-over-month readings in 2022 are replacing these relatively low numbers, year over year inflation is likely to remain high. Once new numbers begin replacing the higher numbers of late-2021 and early-2022, that year-over-year number, or the annual inflation often presented in headlines, may see some relief.
How does this relate to your mortgage or home buying plans?
A phrase we like to use is “you date your mortgage, you marry your house”. Since inflation has a relationship with mortgage rates (all else being equal, higher inflation = higher mortgage rates and vice versa), it means mortgage rates may be set to remain on the higher end this summer, with some relief in the not so distant future! For home buyers, higher rates have pushed some buyers out of the market, and with increases in home inventory in many markets, there may be a great buying opportunity. And while no one wants a higher rate, if you consider most higher rates equate to higher payments in the ‘hundreds’ of dollars, the reduction in buyer competition and increases in home inventory may mean offers on homes don’t need to be ‘tens of thousands’ over list price as we’ve seen in many markets over the past 2 years. And if & when rates dip, today’s home buyers may have a refinance opportunity to reduce their payment.
For anyone trying to time the market, it’s a tough task – when we look at charts, data, and history, it’s easy enough to make predictions, but there is still uncertainty over the supply chain, COVID-related issues in many export-heavy countries, and geopolitical issues that are tough to predict. Our advice is that if you’d like to buy a home and you can afford the payment, it’s a good time to buy! We recommend contacting a MasonMac Loan Officer before you begin your home search so you’re prepared and informed of the current market, and can be in the best possible position to begin to enjoy the benefits of home ownership!