The Inflation Debate: How Does Rising Prices Affect Borrowers?

Consumers saw the price of nearly everything increase, and inflation is currently at a 40-year high.

While inflation is typically considered to be a bad thing, did you know there might actually be an upside to rising prices? There isn’t really but you may be in luck if you were lucky to lock in a field rate mortgage.

How Does Inflation Work?

Simply put, inflation is when the price of goods and services rises. This normally happens at a modest rate of approximately 2 to 4 percent per year. But when there’s a major disruption in the economic forces of supply and demand, like we recently experienced with the COVID pandemic, it can upset the balance between them.

The most widely used indicator of inflation is the Consumer Price Index or CPI. The CPI is defined as the average change in the price of consumer goods and services paid by consumers, such as food, energy, and rent.

When the U.S. Bureau of Labor and Statistics (BLS) releases its latest inflation report, they share the 12-month change in the CPI. In other words, it’s the average of how much the price of the things we need has increased over the year.

How Can Inflation Benefit Borrowers?

While most people will see the cost increases as a negative thing, it could positively impact consumers with fixed debt. For instance, suppose you have a 30-year fixed-rate mortgage that costs $1,000 per month.

If inflation for that year was 4 percent, then next year, that $1,000 will “feel” like $960. Why? Because all your other bills will most likely have gone up by the rate of inflation. At the same time, however, you may have gotten a raise at work to keep up with the inflation rate, frequently referred to as a “cost-of-living-adjustment.”

Either way, even though you’re still paying the same exact $1,000, it now only has $960 of relative purchasing power because $40 was effectively destroyed by inflation. Now continue this trend 18 years into the future. You’ll still be making that same $1,000 payment. However, by this point, it will effectively be like paying $500 in today’s money. Essentially, half of your payment has been erased by inflation.

Millennials are definitely being hit hard, though. According to the U.S. Bureau of Labor Statistics Consumer Price Index (CPI), consumer prices have been up 9.1% since July 2021. That includes a 10.4% increase in food prices and a 59.9% increase in the price of a gallon of gasoline.

Financial Stress Is More Intense for Millennials

People in their 20s and 30s are building careers, establishing long-term relationships, and buying houses. The cost of doing those things was already high. In 2022, it reached another level. Putting gas in the car to go to work every day is a challenge. Younger millennials struggle more. They’re still building their career path, so salaries are lower.

The housing market is also a concern. The American Dream of owning your own home is getting more unattainable for millennials as home values increase and inventory is still limited. Meanwhile, the Fed is raising interest rates to “curb” inflation, making it even more difficult to afford a new home. This eliminates a major wealth-building option for this generation.

Vacations Are Becoming Less Affordable

Most people take a vacation when they’re stressed out. Unfortunately, rising prices have made that almost impossible for some folks, particularly those early in their careers making less money. Who can afford to gas up the car and go on a road trip? Airfare used to be cheap, but planes use gas too. Airfare is up 25% since last year.

Even staycations are more expensive. Energy services (natural gas and electricity) are up 19.4%, and it costs 12.2% more to eat at home this year. Sitting in front of the TV, blasting the air conditioner, and munching on refrigerator food sounds great. Paying for it won’t relieve any financial stress. It’s almost cheaper to go to work. Take-out food only went up 7.7%.

Shortages Are Part of the “New Normal”

Baby boomers remember gas lines and recessions. Millennials saw the longest bull market in history unfold during their adult lives. That was before the 2020 pandemic. This year, we’re seeing supply line disruptions, slow economic recovery, and global conflict. Many have called the post-pandemic years the “new normal.” Shortages are part of it.

Some of those shortages are internal because people can’t afford what they could in the past. In some cases, items we once bought at the market are no longer in stock or are on backorder. The supermarket shelves have empty spaces on them. That’s a new experience for millennials. Hopefully, we’ll see that turnaround soon.

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