As we approach the end of 2014 many of us are asking, “What will the 2015 economy look like?” A key economic driver in 2015 is the expectation that inflation will remain subdued. This environment would provide a compelling reason for central banks to remain accommodative, continuing to support economic growth and asset prices. When put in the perspective of a stronger U.S economy, moderately low inflation might seem surprising. However, there are a number of reasons why it will remain subdued despite improving growth.
In the U.S. we’re seeing moderate inflation, but not the risk of deflation. Contrast that scenario with Europe—where deflation is a real concern. Japan similarly is attempting to stimulate inflation after only recently emerging from a 20-year deflationary period. Continued low inflation is not necessarily a bad thing though. It allows central banks to maintain accommodative policies, thereby keeping interest rates low.
Historically, an important indicator to watch when observing inflationary trends is wage growth. Wage growth is currently at 2.1% annualized, versus the historical average of 3%, and we expect only a modest uptick in 2015, despite an improving labor market. Additionally, falling commodity prices are also limiting inflation, particularly the roughly 40% drop in the price of oil since June. Lower commodity prices generally reduce inflation directly and also indirectly by lowering input costs, enabling savings to be passed on to the consumer through lower prices for products and services.
So how does this subdued expectation of inflation affect real estate? Given these inflationary assumptions housing prices should continue to see a moderate increase and mortgage rates should remain stagnant.
Nick Fandel’s degree in finance, over six years of experience in the industry and intimate knowledge of local markets will help you and your clients succeed. Please call Nick today at (858) 449-9863.
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