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Inflation rising and effects on the mortgage.

tom1ie

Hi all,

Ive always heard that inflation rising is good if you have mortgage debt as:

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers.

However if incomes do not rise but inflation does, how does this help with regards to paying back debt? (Assume a fixed interest rate on the mortgage for a number of years).

Should the above statement say inflation is good to combat debt as long as your wages are increasing also?

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Raoul Duke III

https://www.boards.ie/discussion/comment/118510433#Comment_118510433

just to illustrate my point, have a look at this (key point it is adjusted for inflation):

timmyntc

https://www.boards.ie/discussion/comment/118512704#Comment_118512704

World GDP gains are mostly due to industrialisation of developing countries, and China in particular.

It is not a measure of mean or median purchasing power in any currency, nor the average wages in any country either. Totally meaningless as far as inflation making people richer goes

Raoul Duke III

https://www.boards.ie/discussion/comment/118512720#Comment_118512720

OK. Do you have such a graph showing the long-run trend in mean\median purchasing power?

Ideally for Ireland but any first world country should give similar results.

It's an interesting topic and one where the behavioural aspects (most people tend to say they 'feel' poorer) are not backed up by the hard quantitative ones.

tom1ie

https://www.boards.ie/discussion/comment/118512756#Comment_118512756

Is GDP skewed (in Ireland) due to the FMN effect? As in Facebook Microsoft etc running money through the economy which, for the large part, doesn’t make its way to the populous.

I was under the impression GDP was a bad metric for Ireland. Could be wrong though.

Timing belt

https://www.boards.ie/discussion/comment/118503783#Comment_118503783

If you are on a fixed rate mortgage for say 5 years at a low rate and you have inflation pushing up interest rates then you could find that once the fixed period ends that your monthly mortgage repayment increases significantly. On a mortgage of about 400k every 1% rise in rates will result in an extra 300 euro a month.

With regards the national debt the headline figure of 250bn is not what is important because the yield moves inversely to the Bond price. So the government could buy back existing bonds at a major discount reducing the headline figure and issue new debt to pay for this whilst still having the same cost of servicing the debt. (e.g. if bond prices dropped by 20% they could reduce the headline figure of 250bn down to 200bn more or less overnight)

dotsman

https://www.boards.ie/discussion/comment/118513020#Comment_118513020

Yes, they can reduce the debt somewhat using that tactic. However, that all expedites the move to the higher interest rate repayments as you are issuing new bonds at the high rate to buy back bonds at zero/low rates, so you solve one problem by introducing another (more immediate problem). I don't think you would be able to keep the total annual repayments the same, as there will be other factors influencing bond prices as well, especially since we can't balance a budget to save our lives and keep growing the debt. Add the risk of Sinn Fein getting into Government, and both debt and yields could explode!

Given governments' attitudes to current expenditure to put thing off on the long finger, they may prefer to pay half a percent on €50 billion (€250 million out of the budget expenditure) rather than 3% on €40 Billion (€1.2 billion of the budget expenditure!). But time will tell, as it is difficult to predict exactly what factors are going to come into play in the coming years and what impact they have on yields.

Timing belt

https://www.boards.ie/discussion/comment/118513535#Comment_118513535

I agree there are a lot of other factors that would impact the yield on government debt but if you just look at the rate increase just brought about by the central banks whether it is raising the ECB rate or undertaking QT. The par value of the debt that everyone quotes can become meaningless if rates rise as it will be substantially different to the market value of the bonds. What is far more important is the ability to service the debt by balancing the books.

The other thing that people forget is all the tax that has been warehoused as part of covid has not been written off and will be paid in 2 years time. This could be used to buy some of the debt at market prices and reduce the par value of the debt.

realitykeeper

The general concensus is that inflation is falling. In January 2023, Ireland`s year over year CPI was 7.8%. My own opinion is it will be higher (not lower) than that in January 2024. Will check back in a year to see what happens.

Danzy

https://www.boards.ie/discussion/comment/120283267#Comment_120283267

The rate of increase is not as fast as before.

It looks like it is improving, there are concerns that it might still be higher for longer.

walterking

https://www.boards.ie/discussion/comment/120283267#Comment_120283267

What is that based on?

I expect inflation to be under 3% on next January's read and its based on forward pricing of commodities which are the driver of inflation at present.

Forward contracts for oil, gas, coal, soy, butter, electricity, wheat, lumber, metal, steel are almost all substantially lower than 3, 6, 9 & 12 months ago. Some of this feeds in very quickly (oil), some much slower (coal). But it means that there's deflation in commodities. Also December and January inflation here was in negative territory. February is near certain to be similar, and March last year was over 2% for the month, so by April Irish inflation is near certain to be under 5% unless something dramatic happens in the next 4 weeks.

The move from 5% to 3% will be a lot slower and the move to under 2% slower too.

realitykeeper

https://www.boards.ie/discussion/comment/120296643#Comment_120296643

Even if inflation falls, it will be far too sticky to stop the interest rate hikes. I see energy prices rising because by winter`s end our reserves will be depleted and because we have alienated Russia, we must depend on more expensive energy from elsewhere. The US has also depleted it`s reserves in order to make inflation appear lower than it was and because someone blew up the Nord stream pipeline, we must rely on the US for LNG and oil products. Under the Biden administration, a lot of oil wells have been capped and if there is a shortage the US will satisfy their market before they satisfy ours.

You mentioned "inflation in negative territory" by which you mean dis-inflation. This is still far above 2%, and far above what savers get in the bank so there is no incentive to save. Spending is inflationary.

I also expect food prices to rise a lot this year due to fertilizer costs and regulations.

walterking

https://www.boards.ie/discussion/comment/120297145#Comment_120297145

Inflation for the 6 months August to Jan was 0.64% for the entire combined 6 month. The 1.4% monthly jump today surprised a loth of people as it was expected to be about 0.9% or less. (same as last Feb, so little overall change was expected).

March last year was 2.05%, so the initial print on 1st April will be of interest to many people. The March 2022 energy price hikes will be out of the equation and energy will definitely be in negative territory. Food is the unknown factor. Some input costs are down, (gas and electricity in particular) but the shortage of many crops in the last couple of weeks that has led to substantial fruit/veg increases which probably contributed to the February surprise.

realitykeeper

https://www.boards.ie/discussion/comment/120302006#Comment_120302006

The February inflation figure will be out tommow. Year over year inflation was 7.8% in January 2023. I expect it to be higher than that in January 2024. I will check in each month to see how things stand. Tomorrow will be interesting.

Timing belt

https://www.boards.ie/discussion/comment/120304036#Comment_120304036

The bond market says otherwise re inflation in 1 years time for the UK and USA with lower yields after the 1 year. Europe on the other is the same as today.

realitykeeper

https://www.boards.ie/discussion/comment/120304053#Comment_120304053

Yes the cost of government borrowing will increase when the bond investors realize the Central bankers misled them, either by incompetence or more likely because they are trying to keep bond yields subdued by saying how they are serious about raising interest rates. I think what will happen is bond investors will start demanding higher rates of interest as sticky inflation stays stubbornly high. If that happens, governments must either cut spending or more likely continue spending which will weaken their currencies which will fuel further inflation.

walterking

https://www.boards.ie/discussion/comment/120304036#Comment_120304036

The initial Feb figure was published yesterday. Surprised in the high side with 1.4% monthly increase v 0.9 last year, so .0.5% on the rolling annual figure. Fresh produce was the driver with some fresh foods up 20%+. This should be short lived as it is weather related. The big energy increases of last March will go ut of the equation this month, so that should see a negative print for March.

I'll lay a €50 donation to an animal charity that end of Jan 2024 will be under 3.5% 😀

tom1ie

https://www.boards.ie/discussion/comment/120306092#Comment_120306092

Will it be short lived though? The price of fertiliser, transport and diesel for agricultural machinery all still very high relatively speaking.

realitykeeper

https://www.boards.ie/discussion/comment/120306092#Comment_120306092

Okay February was round one. I win that round. Eleven more rounds to go until January 2024.

By the way, that rise in inflation came as no surprise to me. Our politicians are predicting lower inflation and central bankers are declaring their seriousness about fighting inflation because if bond investors were to know the awful truth about the higher inflation coming our way, bonds yields would have to rise, making borrowing more expensive for governments. Even if they were to fix the figures the way they want them, it won`t change reality in the ground.

If you look beyond the EU to countries that have had very high inflation like Lebanon, Turkey, Venezuela and Zimbabwe, the official inflation and the official exchange rate for hard currencies, has no relation to reality. In those countries, people buy hard currency on the black market. I am not saying the EU is in that league but if it were, there is every reason to believe the official inflation would be a lot lower than real inflation. And, why wouldn`t it be. No government wants to give itself a F in economics.

realitykeeper

Okay so Ireland`s CPI inflation rose only 1.1% in March which is less than the 1.6% it rose in February. Still, if inflation keeps rising by more than 1% every month, imagine how high Year-over-year inflation will be by January 2024. It would be well over 12%, if it keeps rising at that pace. Some posters here think it will be below 4% y-o-y but we are already up 2.7% in the space of 2 months.

Well, the inflation figure for April should be known early next week, so we will soon see how that looks.

walterking

https://www.boards.ie/discussion/comment/120535209#Comment_120535209

April initial estimate is -0.5% giving annual rolling rate of 6.3%

realitykeeper

https://www.boards.ie/discussion/comment/120537192#Comment_120537192

1.6 + 1.1 - 0.5 = 2.2% over three months. If each of the next three quarters were to have equally high inflation, that will be 2.2 + 2.2 + 2.2 to add to this 2.2, which would total 8.8% over 12 months. Our present inflation is 7.7% for the last 12 months (or 6.3% if the most recent adjustment is correct). But in any case, we will see how the April figure looks when it is decided upon.

My own expectation is for y-o-y inflation to be considderably higher that 8.8% come the end of January, 2024.

walterking

https://www.boards.ie/discussion/comment/120537502#Comment_120537502

What are your figured based on?

Virtually all commodities have been falling in price (sugar is the outlier). These falls will feed into prices over the next 6-8 months.

Eg, Coal prices will drop by 30% by September, home heating oil has dropped 30% already, gas and electricity have started to drop substantially for business users on market rates and domestic price drops are next.

It is likely that the next 3 months will print negative figures too.

I stand by my January 2024 prediction as fundamentals have not changed

Nigzcurran

Can someone please ask them to stop raising my interest rate. Please

tom1ie

https://www.boards.ie/discussion/comment/120537802#Comment_120537802

Will we see drops in food prices though?

How do we know food sellers (not producers) aren’t going to increase profit margins to soak up the gap between production price and selling price?

realitykeeper

https://www.boards.ie/discussion/comment/120537802#Comment_120537802

I am using Ireland`s CPI inflation for each month. Is 6.3% or lower, your y-o-y prediction for January 2024?

I will go with 8.8% or higher.

Commodities are not the only cost incurred by businesses. They must also factor in higher interest rates. The nitrates ban will increase food prices and Europe`s energy reserves are now depleted and must be replenished before next winter. Also, Europe buys the most expensive energy, unlike the days when we used to buy it from Russia.

Jim2007

Moving this topic as it is more appropriate for the economics forum.

Geuze

Here is the CPI data up to March 2023:

Geuze

Flash estimate for HICP for April 2023:

Prices in Ireland estimated to have risen by 6.3% in the 12 months to April 2023

The EU Harmonised Index of Consumer Prices (HICP) for Ireland is estimated to have increased by 6.3% in the 12 months to April 2023 and increased by 0.3% since March 2023.
This compares with HICP inflation of 7% in Ireland in the 12 months to March 2023 and an annual increase of 6.9% in the HICP for the Eurozone in the same period.
Looking at the components of the flash HICP for Ireland in April 2023, energy prices are estimated to have fallen by 1.3% in the month and risen by 12.1% over the 12 months to April 2023.
Food prices are estimated to have increased by 0.5% in the last month and are up by 12.8% in the last 12 months.
The HICP excluding energy and unprocessed food is estimated to have risen by 5.3% since April 2022.
Eurostat will publish flash estimates of inflation from the EU HICP for the Eurozone for April 2023 on 02 May 2023.

realitykeeper

Well the rivised inflation figure is in, and not surprisingly it is higher than the initial -0.5% estimate. It is in fact + 0.3%.

So, let us recalculate the inflation for the last three months:

1.6% for January + 1.1% for February + 0.3% for March. That gives us a full 3% inflation. If the next three quarters do not improve, then we can expect y-o-y inflation of 12% come the end of January 2024.

realitykeeper

https://www.boards.ie/discussion/comment/120537935#Comment_120537935

I have no doubt a lot of people are asking them to stop raising interest rates. I assume you have a mortgage?

Well, the present dynamic is a fascinating one. The recent surge in stock markets has happened because a lot of people think the central banks will have to stop increasing interest rates and are positioning themselves accordingly. Ironically, the rising interest rates are killing the fundamental value of many of the stocks that are going up on this gambit.

But more to the point, why would the central banks stop raising interest rates when they can point to the strong stock market as a reason to keep going. When investors realise they are the very reason the central banks are not giving up, anything could happen. Investors could dump stocks for example. Then, the central banks will be much more likely to cut interest rates. The next donimos could be the bond markets, followed by currencies.