Annual consumer inflation rose to the highest level in 40 years. The meteoric rise in prices was due to a spike in gas prices, the current supply chain shortage, a lack of workers along with big money flowing through the economy from Congress as well as the Federal Reserve.
Rising inflation is eating away at strong gains and wages and salaries that American workers have seen in recent months: Real average hourly earnings rose just 0.1% in December, as the 0.5% inflation increase eroded the 0.6% total wage gain, according to the Labor Department. On an annual basis, real earnings actually declined 2.4%.
The eye-popping reading – which marked the seventh consecutive month the gauge has been above 5% – will likely amp up pressure on the Federal Reserve to begin hiking interest rates as soon as March in order to combat the recent price surge. Hiking interest rates tends to create higher rates on consumers and business loans, which slows the economy by forcing them to cut back on spending.
“The Federal Reserve will most likely raise interest rates earlier than anticipated to control inflation,” said Dawit Kebede, senior economist at the Credit Union National Association. “This is in addition to ending its support for the economy in the form of large asset purchases. This will raise the cost of borrowing for consumers and will reduce excess demand for goods.”
Chairman Jerome Powell has already signaled the U.S. central bank plans to speed up its withdrawal of support for the U.S. economy in order to combat inflation, which has been higher and longer lasting than policymakers initially expected.
Home borrowing costs jumped in the latest week but remain historically low. The MBA reports that the 30-year fixed-rate mortgage spiked by 19 basis points to 3.52% with 0.45 in points for the week ending January 7, 2022. Within the report it showed that the Market Composite Index rose 1.4, the Purchase Index was up 2% while the Refinance Index was essentially unchanged.
An MBA spokesperson said, “The MBA expects solid growth in purchase activity this year, as demographic drivers and the strong economy support housing demand.”
Good news from the housing sector as mortgage delinquency rates fell to pre-pandemic levels in October due in part to an improving labor market and higher home prices. CoreLogic reports that in October, 3.8% of mortgages were delinquent by at least 30 days, including foreclosure, near the 3.7% rate recorded in October 2019. In October of 2020, the delinquency rate was at 6.1%.
Frank Martell, president and CEO of CoreLogic said, “We expect to see delinquency trend down over the balance of this year as the economy continues to rebound from the pandemic, employment grows and high levels of fiscal and monetary stimulus continues.”