The Consumer Price Index, CPI increased 0.9% in April, which was the most significant monthly increase since April 1982. If we had this rate of inflation for all of 2021, it would amount to a rate of inflation of 10.8% annually. The experts forecast a 0.2% rate, so why was inflation so high in April?
There are a few reasons why.
1) During the COVID pandemic of 2020, many people saved money because of economic uncertainty. Many people spent less money commuting to work, dining out, vacations, clothing, cosmetics, and medical care. This money went into savings is now being used because of pent-up demand for products and services. 2) Stimulus money was used by consumers and added extra purchasing power for consumers. 3) The housing market has been on a tear creating a significant demand for durable goods and services. 4) The national average hourly wage rose 20 cents in April to $25.45. Business competition for workers puts upward pressure on wages. 4) The monetary policy from the FMOC (Federal Open Market Committee) in the past has targeted inflation at 2%.
The inflation rate for the last eight years has been under the target 2% rate. The FMOC policy has shifted to target a higher inflation rate to compensate for the lower inflation rate of previous years. 5) Inflation was almost non-existent for the first half of last year. Compared to last year, with a shallow base level of inflation, any increase will seem exaggerated.
In summary, although the rate of inflation may seem higher than usual in April, forces will help return it closer to the FMOC target rate of slightly more than 2% annually. The stimulus payments will end in September, reducing the money supply and reducing inflationary pressure. The funds saved last year will be used this year for purchases. Schools and daycare will open in September, allowing more workers to enter the workforce. When more workers enter the workforce, there is downward pressure on wages. Mortgage rates should continue to be historically low in the 3-3.5% rate for a 30 year fixed rate mortgage in 2021. If you are thinking of buying or selling a home in Sarasota or Manatee County, please call me today at 941-799-9440.
