Balloons

Balloon balloons everywhere. They seem to be all the rage and capturing all the headlines these days. So in keeping with that theme let’s explore how you can even bring inflation into any balloon discussion you happen to be having at cocktail parties, conspiracy theory meetings, or realtor events.

First let’s talk balloon. You’re carrying a new helium-filled balloon inside for a birthday party and in a moment of forgetfulness let go of the string. Being lighter than its surrounding air, the balloon quickly rises. As it increases in altitude, the balloon eventually finds an equilibrium point and stays there for a brief period. As pressure and leakage exact its toll on the balloon it begins to float steadily back down towards Earth. 

Now let’s talk inflation. When too much money chases too few goods, inflation begins to rise quickly. Once inflation reaches a certain level, the Federal Reserve raises interest rates. The economy (and prices) finds an equilibrium level and stays there for some period of time. These higher rates exert pressure which begin to exact a toll on the economy. Prices begin to float steadily back down and balance between demand and supply is restored.

Sounds reasonable straightforward and intuitively makes sense. But it’s not quite right. Inflation is coming from 3 different sources within our economy - Goods, Services and Food/Energy. Goods can be best described as things like homes, furniture, cars, and TV’s. Services can be best described as things like entertainment, travel, hotels, and childcare. Energy/Food can best be described as, you guessed it, food, gasoline, and oil. So while the Federal Reserve hikes are taking their toll on all of these, some are stronger than others and therefore take longer to be brought back down to Earth. For example, the financing of homes and cars is certainly slowing, the consumer is still spending like its 1999. But they can’t continue this forever. So even while our inflation balloon is definitively heading back towards the ground, there are moments in time where the inflation balloon seems to be re-inflating with helium. 

The great lesson in all of this remains the same: Do not assume that lower rates during Q1 and Q2 mean inflation is under control enough to have the Fed ease off the gas pedals. Understand that the path to permanently lower rates is going to be long and bumpy. Rates will bounce around between 6% - 7% for the next quarter or so. We’ve been preaching this to you for the last 12 months. So, take advantage of the times when rates are lower and don’t freak out when rates go higher. Know that we ARE ON THE RIGHT PATH and are much closer to having permanently lower rates but still need to get through Q2. Finally know that inventory is incredibly low and anyone smart enough to buy a home now can refinance later this year AND have more choices in more neighborhoods than they ever will once rates reach the 5.5% and below level.