Another buffer against inflation is that productivity growth has been rising. Anytime workers produce more in a given time period, then companies do not need to raise prices on goods and services even while paying a bit more to workers to extract profit. Finally, corporate profit levels are at an all-time high. It is the profits along with the loose monetary policy that has fueled the 5-year bull market for stocks. The very high profits mean that higher wages that may arise in the future do not have to get passed on as higher prices on goods, as a slight profit squeeze can easily be absorbed. Had the profit margin been razor thin, then higher wages would immediately register as higher consumer prices.
Let’s not lose sight of what ordinary Americans feel about inflation, either. They care not about core inflation but everything, including what they buy every day at grocery stores and at gas stations. Food prices are already on the rise, clocking in at 5 percent annualized increases in the past two months. Gasoline prices have been lower now versus a year before, but the uptick in crude oil prices hint towards higher gasoline prices this summer. Some public unease over food and gasoline prices, if sustained, will no doubt play into the thinking of Fed policy makers.
All-in-all, inflation looks to rise. For 2014, CPI is expected to rise by 2.7 percent and then move even higher to 3.3 and 3.7 percent by 2015. This inflation forecast is notably higher than the Federal Reserve’s and Wall Street’s. If such inflation does pop out then it will be a surprise. The Fed will quickly signal and then take action much sooner. The 30-year fixed rate mortgage rate is projected to hit 5.5 percent by the summer of next year.
Lawrence Yun is the chief economist for the NATIONAL ASSOCIATION of REALTORS®. In this exclusive, monthly column for the Power Broker Report, Yun shares his insider insights on the national and regional housing markets, and the U.S. economy at large.
