The minutes from the recent Federal Reserve meeting were released today and they continue to support the notion that our economy is slowing down. In fact, the minutes said there is an expectation for the economy to shrink over the first half of the year.
For an in depth review of the minutes, check out this article by Chris Isidore, a CNNMoney.com senior writer. To quickly summarize, the Feds posted negative revisions to their 2008 forecasts on economic growth, unemployment rates, and inflation. Specifically on inflation, the Feds said “it now expects personal consumption expenditures (PCE) to rise between 3.1% and 3.4% in 2008, a full percentage point more than its earlier expectation.”
What does that mean? The Fed’s target area for PCE (one of its favorite tools to measure inflation) is 2%. In April, that figure was at 2.1%. That means the Feds expect to see the PCE increase an entire percentage point by the end of 2008. I know what you may be thinking, “what is the big deal about 1%?” As an example, let’s use the cost of a gallon of milk with the time frame of 30 years.
This past weekend, I bought a gallon of milk for $4. Under the Feds preferred PCE target of 2%, in 30 years that same gallon of milk will cost $7 a gallon. At 3.4% (the high end forecast for inflation this year), the price of milk goes up to $11a gallon! This of course is inflation only and makes no assumptions on the cost of producing milk, food for cows, etc, but you can see why inflation is such a big priority for the Federal Reserve.
…for a sobering example of the increased cost on big ticket items, see this previous post using the MSRP price on a Toyota Corolla…
Inflation will also have a negative impact on mortgage rates. As inflation figures continue to climb, you can also expect to see an increase in rates. Now the increase could be tempered with bad economic reports/forecasts, but expect inflation to cause an increase to rates as we continue to move through 2008.
Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.
