Inflation and rates, return to focus
June 2, 2009 by admin
Inflation and the potential for future inflation growth is beginning to enter into the marketplace. The effect of inflation on a market has historically led to higher interest rates. The anticipation of products/services/commodities becoming more expensive in the future will influence investors to seek a higher premium in a current marketplace. Their desire for a higher premium, allows the to safeguard themselves financially in the even that inflation reduces the value of their investment in the future. The result of a higher required premium in today’s marketplace will directly be reflected in higher interest rates. The economy has withstood a significant recession and is beginning to show a breath of life over the past sixty days. This rebound in the market can be seen in two areas, the stock market which is up over 30% and the price of oil, which has nearly doubled in the past sixty days and is now approaching seventy dollars per barrel.
Oil prices are a major component of the market. Last year, as oil prices surged, the average consumer felt considerable financial pain as the cost of a gallon of gasoline eclipsed $4. The large jump in oil prices helped to push the economy into an economic recession and was a component in crippling the auto industry that was not prepared for a shift in consumer demand to smaller and more fuel efficient vehicles. Today, it is hard to imagine oil prices climbing back to $140 per barrel in the tough economic times that the world is currently facing, but the fact that oil has rebounded sharply from its low point earlier this year is a signal that stability is returning to the market.
The effect of high oil prices could carry through many different industries, from travel, to the auto industry and even the housing markets. As oil prices climb and investors begin to assess future markets supply/demand, their will likely be a greater concentration on traditional market beliefs such as inflation, roi and alternative investing options. The short term impact is that inflationary concerns have aided in the rapid increase of yield within the bond markets. The ten year bond is again approaching the 3.7 level, mortgage bonds have surged and fixed rate loans are now above five percent for both fifteen and thirty year loan terms. Housing which is greatly influenced by mortgage rates likely wont see a significant change unless rates were to jump above 6%. Mortgage lenders are likely to see a slow down with refinance applications. The reality is that in a normal economy, oil prices are one of a number of factors that help to set interest rates. Mortgages work like any typical commodity; investors move in and out of these positions, the greater the demand, leads to lower rates. A return to a normal market may lead to higher interest rates, but could provide comfort that the world economy is closer to pulling out of a long recession.