Inflation On the Rise

The Mortgage Corner

Inflation is finally rising enough to bite into consumers’ paychecks. It is also a sign that economic growth is increasing at least temporarily, as consumers borrow more to buy more. But the bottom 50 percent of income earners have seen no real average annual income growth since 1980, which means at least one-half of all consumers have to eventually stop buying and start paying back those loans when inflation and interest rates increase further.

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Graph: Econoday

Retail inflation is up 2.9 percent annually, which has to begin to hurt the heavily indebted consumer, as I said. But enthusiasm over the full employment numbers and job availability are keeping consumers buying for the moment. It is because there are more available job openings than jobs being created at the moment—almost 1 million, a huge gap —which is why more workers are quitting their current jobs, reports the Labor Department’s JOLTS survey.

The rising so-called Quits rate is big news because it means workers are moving to better job opportunities; a sign of rising incomes as well. Americans quit their jobs in May at the fastest rate since 2001, showing that employees feel so good about the economy they are willing to leave one company for another.

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Graph: Econoday

Job openings slipped back but still remain very abundant, at 6.638 million in May vs. an upward revised and record 6.840 million in April. Openings are up 16.7 percent compared to May last year and are far above hiring, at 5.754 million in May for comparatively distant 4.9 percent year-on-year gain.

But watch out, the University of Michigan consumer sentiment index fell in July to a reading of 97.1, below June’s level of 98.2, which is an indication that the trade war bombast is beginning to worry consumers. That’s the lowest level since January. Prices are on the rise, yet interest rates haven’t yet followed.

Why? Part of the reason is that longer-term interest rates are stuck at a very low level, so that there is little difference between the 2 and 10-year Treasury yield, a sign that many bond investors don’t trust the predictions for higher growth. It’s a flight-to-quality syndrome when investors flock to a safe haven from future uncertainty with lower, but safer yielding investments, such as government-guaranteed sovereign bonds.

So we are seeing a growing unease in investors and consumers about the future, with consumers’ personal savings rate barely above zero (2.8 percent), with no cushion to fall back on should there be either a market crash, or full-blown trade war that lifts prices for everyone, or an actual war.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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