Global Inflation Fears - A Changing World

A: Get used to it! Either you adapt because you are keeping tabs on what is going on in the world or you don't. I hope it's becoming more clear why I talk about this inflation stuff here on UrbanDigs instead of writing about the next good deal in town. The world is changing. As global economies continue to have strong growth, inflation becomes more of a problem and that ultimately makes money more expensive to borrow. Already, I see the number of mortgage applications falling due to higher interest rates. If this continues, you can argue the ultimate negative effects on purchasing power and consumer spending.

First, onto the latest news. According to Yahoo Finance's article, "Productivity Slows in 1st Quarter / Wage Pressures Ease":

The productivity of American workers slowed sharply in the first three months of this year but wage pressures eased as well, providing evidence that inflation is being restrained.

Don't get excited yet! The article continues:

Labor costs rose at an annual rate of 1.8 percent. That was up from an initial estimate of 0.6 percent growth in unit labor costs but was still lower than the 8.9 percent surge reported in the final three months of last year.

While higher wages are good for workers, increases that outstrip the growth of productivity can trigger unwanted inflation as employers are forced to boost the cost of their products to meet their higher payroll costs

And finally, the kicker:

Rising productivity means that employers can boost salaries because of workers' increased efficiency. It is the single most important factor supporting rising living standards.

But productivity didn't rise! It is slowing, yet the economy seems to still be growing -----> which means an inflation problem! Confused? Here, try another source.

According to CNN Money's article, "Wall Street Slumps at the Open":

Investors' rate jitters intensify after a government report shows productivity slowing amid a growing economy, an inflationary signal that could mean rate hikes are coming.

Worker productivity in the first quarter was much lower than original estimates, according to a government report Wednesday that was in line with the latest Wall Street expectations. The slower productivity raised inflation concerns, and could keep the Federal Reserve from moving to cut rates to spur the economy.

Over in Europe, the ECB (Europe's equivalent of our Fed), raised rates by 1/4 point to 4% and issued a statement saying, "...and the bank's president Jean-Claude Trichet said that European economic growth is significantly stronger than expected, and that inflation risks are on the rise." The ECB is more transparent than our Fed and it is safe to assume that MORE rate hikes are coming in Europe. This will put further pressure on the US Dollar and keep our Fed on the ropes to either hold steady for a longer period of time or hike rates sometime in the future to help curb inflation and support pricing stability and our currency.

I don't need to explain this effect on purchasing power and affordability again do I? Ok, I will, one last time:

AS INFLATION LOOMS AND RATES HEAD HIGHER TO COUNTER IT, MONEY GETS MORE EXPENSIVE TO BORROW. AS MONEY GETS MORE EXPENSIVE TO BORROW, THE CONSUMER GETS HIT WITH RISING MIN PAYMENTS AND HIGHER BORROWING COSTS ON LOANS. PURCHASING POWER RESTRICTS AS AFFORDABILITY GOES DOWN. THE CONSUMER CAN'T AFFORD WHAT THEY USED TO AND THAT MEANS PRICES HAVE TO COME DOWN TO STIMULATE SALES, WHICH IS THE ULTIMATE GOAL OF HIKING RATES IN THE FIRST PLACE ---> TO COUNTER INFLATION AND BRING PRICES LOWER.

This stuff is very important to understand and is crucial if you wish to be ahead of the markets in your investments.

As the world finally 'gets it' and realizes that inflation is not going away, those in the dark will be hit hard by what is to come. If you see the 10YR bond yield pass 5% and head closer to 5.2% or so, expect lending rates to really pop and move closer to 7% on 30YR fixed! For anyone that says "7%, yea right, that guy doesn't know"...is living in a fantasy world. Fact is, this is a very good possibility and so far there has been very little data and news released to reverse the current trend of rising rates, strong economies, and still bothersome inflation! Either you adapt to it, or you get hit!

If this does follow through, you will start to hear that inflation is the direct cause for the next leg of the housing downturn as borrowing costs rise driving down demand and affordability. House prices will have to fall further to stimulate sales.

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