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About Inflation
Inflation, or price-level growth, is important for REALTORS® because it ultimately affects mortgage rates and the ability of home buyers to purchase a home. If the Federal Open Market Committee (FOMC) lowers interest rates to stimulate the economy, you may see more home buyers in the market; however, lowering rates can also lead to inflation. So, to combat inflation, the central bank increases interest rates—which may dampen economic growth and demand for home buying.
During the recent financial crisis, fears of deflation (price-level decline) were rampant. With financial markets now stable, some fear that inflation is around the corner. There is also the possibility of stagflation, characterized by high unemployment and high inflation. In stagflation, it is difficult for the central bank to raise interest rates to combat inflation due fear of further job market deterioration if demand is hurt by the increased interest rates.
Highlights for May 2011
- Increases in producer prices continue to spill into consumer prices, especially in energy.
- A weaker dollar may boost exports, but it translates into higher import prices.
- Headline consumer prices have increased far too quickly in the month for the fifth month in a row; only apparel, computers, and household furnishings have seen price declines recently.
- In addition to pressuring the FOMC to raise interest rates, higher prices put stress on consumer budgets.
- One piece of good news is that consumers expect gas prices to stop rising.
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