MBA economist says inflation not transitory: Here’s what that means for interest rates

Inflation is rising at its highest rate in more than a decade, a trend that one economist believes could continue for the next several years. 

The inflation rate increased 5.4% annually in September, the highest it’s been in the past 13 years, according to the latest Consumer Price Index (CPI) from the Bureau of Labor Statistics. Now, economists are discussing what this higher inflation level means for today’s economy. Mike Fratantoni, Mortgage Bankers Association (MBA) senior vice president of research and chief economist, said today’s high rate of inflation that isn't tied to supply-chain bottlenecks is not transitory. And it could continue to be higher than the Federal Reserve’s 2% target for the next two years. 

"We’re really pretty confident that [housing costs] are going to keep rising even after some of the things like used car prices and other things that are directly related to supply-chain constraints revert," Fratantoni said in a press briefing Monday. "Those things are going to be transitory once those supply chain issues go away. But I think the shelter price component is going to persist for a long time – like years."

As the economy transitions after the COVID-19 pandemic, interest rates are beginning to rise, being pushed by today’s economic growth. Homeowners can take advantage of today’s low rates by refinancing their mortgage, which could potentially help them lower their monthly payments. Visit Credible to find your personalized rate and see how much you could save.

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Wage growth to remain strong

Higher levels of inflation — driven by supply shortages, high demand and even the labor shortage — are driving up prices across the U.S. But as inflation continues, wage growth is keeping up as Americans gain more negotiating power and businesses are forced to pay more.

"You have the rising rate of quits, you have strikes again," Fratantoni said. "You have people, obviously, with some negotiating power on the wage front. You look at those wages metrics, you look at the number of small companies having trouble filling open positions, determine that they're going to have to raise wages to try to fill them and having a sense that they can raise prices to pay for those higher wage costs."

Average wages increased at 4.6% annually in September, up 0.6% from the month before, according to the latest employment report from the Bureau of Labor Statistics (BLS).

"Wages are increasing, not as fast as home prices, which those two things have to sooner or later get connected, but they're increasing," Freddie Mac CEO Michael DeVito said in a session at the MBA’s annual conference in San Diego. "And overall, I think this country's great at solving supply problems in the long run. It won't be short run, and it won't be without some fits and starts, but overall I think in the long run the housing market looks pretty strong."

As prices rise and economic growth continues, interest rates will also begin to increase. If you are interested in lowering your mortgage payment as other costs go up, visit Credible to compare multiple lenders at once and choose the one with the best rate for you.

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Inflation to run higher than 2% target - what it means for interest rates

As inflation continues to run high, Fratantoni predicted in his outlook that Americans should expect it to continue to surge above the Federal Reserve’s targeted 2% rate for a while. 

"I think all the wage measures you look at, all the inflation you look at are sort of consistent with the story of a real risk of inflation running higher than the Fed’s 2% target for at least a couple of years," he said.

But one way the Fed can fight inflation if it continues too long is through raising interest rates and ending its bond purchases that are creating economic stimulus. Now, the Central Bank has stated it could begin raising rates as early as next year. 

Previously, the Fed projected that it would begin raising rates as early as 2023, however it has since moved that timeline back, saying it could increase rates as early as the third quarter of 2022. And mortgage rates will also begin moving higher. The MBA forecasts that the average 30-year mortgage rate will end 2021 at 3.1%, and move up to 4% by the end of 2022. By the end of 2023, mortgage interest rates will run just below the 4.5% mark, according to the forecast.

Other factors could affect the inflation forecast and cause Federal Reserve Chairman Jerome Powell to change the monetary policy for interest rates, such as a continued high unemployment rate, labor market shortages and continued high energy prices. 

If you are interested in taking out a mortgage refinance amid the current low rates and high inflation expectations, contact Credible to speak to a home loan expert and get all of your questions answered.

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