When the Fed does act to raise interest rates to prevent inflation, this is
important to our economy. We have been suffering through a recession and tepid
recovery for so long, many have forgotten that the Federal Reserve Board's
overriding purpose is to use monetary policy to protect us against inflation. In
reality, inflation has not been a major factor in our economy for decades. The
annual inflation rate in the United States has exceeded 3.0% only five times
since 1991 and has not been over 4.0% during this same period of time.This is not to say that lower levels of inflation do not affect our citizens. For example, if inflation averages 2.5% per year (a bit higher than the Fed's current inflation target), prices will double in 28 years. That may seem like a long time, but consider this. If you bought a home of $300,000 today and the home increases in value at a 2.5% annual rate, it will be worth over $600,000 when the loan is paid off.
Likewise, if someone is paying $2,000 in rent today and the same rate of inflation is applied, their rent would rise to more than $4,000 in 30 years. Thus, the cumulative effect of inflation is significant even when the rate of inflation is low. And even when the general rate of inflation is low, certain areas exceed the general rate. For example, the rate of rent inflation has exceeded the general rate of inflation for the past several years. This has made it difficult for renters to afford housing while those who own are not subject to the same increased inflationary factors.
Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500
mike@mikeervin.com
