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Fear Not Inflation

07/14/2018

Let’s assume you get a 100% VA mortgage for a new house.  Let’s further assume that, ten years later, your mortgage is down to $80 thousand, and your home is now worth $125 thousand.  Originally, the loan-to-value of your mortgage was 100%.  But, that dropped to a much safer 64% ten years later (80/125).  My point is this:  there are advantages to inflation.

Debt can either be repaid or inflated away.  Our national debt was over $21 TRILLION.  Do you really think we’re going to repay that in your lifetime?

The latest data from our Producer Price Index is up 2.7% on year-over-year basis.  The Consumer Price Index is up 2.9%.  While that seems modest in comparison to the Reagan era, remember it was only four years ago that the Fed was worried about deflation, when values decrease — a much more pernicious problem.  The Fed had been praying for 2% inflation, and we have now blown past that goal.

There are two types of inflation: demand-pull and cost-push.  Demand-pull inflation occurs when increased demand for a product/service pulls up the price.  That is NOT the type of inflation facing America today.  Instead, we are facing cost-push inflation, where the increasing price of inputs causes final product prices to increase.  Today, with our capacity-utilization about 80%, there is very little excess production capacity.  One of the most important inputs is labor, and there is very little unemployment to draw into the workforce.  Salaries have started to rise and can be expected to rise faster.  Lastly, don’t forget that tariffs also increase costs.

Inflation is coming!  Rejoice!!   

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