Listen to Audio Segment of Brad on Real Estate Revealed Here:
Transcript of Real Estate Revealed Show on AM560 from Sunday, March 21, 2021
Good Morning. Spring is in the air finally and hopefully we have put the snow behind us for this year.
This morning I wanted to discuss the possibility of Inflation and how Inflation might impact Interest Rates and the commercial lending market.
Before I dive into the concerns about inflation, I first want to be sure everyone is on the same page in regards to what inflation is. Inflation is where over time the costs of goods and services in an economy rise. In essence, the spending power for each dollar goes down as costs go up. If costs go up too quickly and the increase in costs outpaces the increase in wage growth, consumers cannot continue to buy the same amount of goods and services.
The Federal Reserve closely monitors inflation and adjusts interest rates accordingly to help manage inflation. A certain amount of inflation is good and necessary. It means the economy is growing. Currently the Federal Reserve is targeting inflation in the 2% range being a healthy level of inflation. But too much inflation can have devastating impacts.
There is a lot of concern about inflation in the market right now based on all of the stimulus that has poured into the economy from the Federal Government. The Government just approved another $1.9 trillion in spending via the most recent stimulus bill. To put this in perspective, the Federal Government brought in $3.83 trillion in tax revenue in the 2020 fiscal year, which by the way was the highest amount on record. Just the most recent stimulus bill represented 56% of the taxes collected. The combined cost of all three Covid relief bills was $3.9 trillion, just over one year of federal tax revenues.
To provide another perspective, U.S. GDP in the 2020 was around $21 trillion. The $3.9 trillion in Covid relief bills represents roughly 19% of all business the Country generated in the last year.
Now where does the government get this money when there are not sufficient tax revenues. The government must borrow the money. Borrowing money and pumping it into the system can be inflationary. Additional dollars are being pumped into the system that could raise prices and weaken the buying power of dollars already in the system.
There are many economists who don’t think inflation will occur because the economy was so depressed already due to Covid. However, others are concerned about inflation pressures as there have already been price increases for many goods and services and if the economy starts to recover with all of this stimulus in the system, it could accelerate inflationary pressures.
Personally, I don’t think any of us have to go very far to find signs of inflation. We are all feeling it personally whether at the gas pump or in the grocery stores. Prices are clearly higher.
Many commodity prices are much higher as well. Aluminum prices are almost double today (which impacts everything from soda to automobiles), the prices for many precious metals are up (essential for car batteries and electronics), and wood is substantially higher. A two by four today is north of $8. Just a few years ago it was in the $2 range. These cost increases are increasing construction costs as another example. We have had numerous manufacturing clients tell us they have been forced to raise prices for goods due to higher material costs.
Although I do not know if inflation is going to increase in the next year, if it does the primary tool the government has to slow it down is to raise interest rates. Depending on how fast inflation goes up, the government could have to raise interest rates quickly to counter it. Any increase in interest rates will likely slow the economic recovery. It will also increase borrowing costs. Because of this, we are definitely recommending that any clients that have debt coming up in the next twelve months be sure to lock in new interest rates and terms now while rates are still low.
We are currently working on our next newsletter. We intend to take a deep dive into inflation in that newsletter and its impact. I encourage you to go to our website at www.commerciallendingx.com and sign up for our newsletter so you can get the details when it comes out in the next couple of weeks.
As always, I can be reached at 630-988-4852 or via email at brad@commerciallendingx.com. Thank you.