Wednesday, January 16, 2008

Highest Inflation in 17 Years

Woke up this morning to see an Excite article to see that inflation is the highest that it's been in 17 years.

Of interest to note, is that the two items that rose the highest last year were energy and food costs. Energy costs were up 17.4 percent, and food costs were up 4.1 percent. This is the highest that it's been since 1990.

The report, issued by the Labor Department, said that inflation outside energy and food costs were tame. I don't know about you, but energy and food costs just happen to be the two things in my budget that are not fixed, and there's only so far you can squeeze them.

Now I'm pretty good with the food costs, and there were several weeks last year that I got by with spending $25 for the week (out of necessity), and that included diapers, but that's primarily because I always shop for things when they are sale and I always have a surplus because I buy this way. People still have to drive to work and back though.

What does a typical person's budget look like? Not the numbers, but whether something is fixed or not. I'll give a breakdown of my budget, and I guess I may be semi-typical, other than I don't have credit cards:

Mortgage - fixed
Car payment - fixed
Student loan - fixed
Trash - fixed, but subject to increase
Sewer - variable
Water - variable
Internet - fixed, rates locked in for now
Vonage (phone) - fixed, but subject to increase
DirecTV - fixed, but subject to increase
Electricity - variable
Gas - variable
Food - variable

I may have other things but I can't think of them. The three largest items in my budget, outside of the mortgage and car payment, are variable. There's not much you can do to decrease them. And they are also the three items that went up the most in 2007.

Because I'm pretty budget conscious when it comes to groceries, I really notice when the prices go up. Surprisingly, around here, the price of ground beef has remained fairly stable, I can still get that for $2 a pound not on sale. There was even one week last year when they had beef on sale for $1 a pound and I was able to buy 20 pounds or so. Milk has gone up, however, as well as soda, processed foods like chili, bread... I even saw a higher price for frozen vegetables two weeks ago.

The question that I'm wondering is... why is the federal reserve keeping interest rates so low? Haven't they been saying for at least 10 years that inflation has not been a problem and that keeping interest rates low was promoting economic growth while keeping inflation down? Since inflation is going up, shouldn't they raise interest rates to try to curb it?

When my parents bought their home in the 1970s, they were lucky because they didn't have to pay a double digit interest rate on their mortgage. Interest rates that high are unheard of today. But maybe they should be closer than that, rather than sitting at the ridiculous lows that they've been at for nearly the past decade.

There is one downside, of course, to raising the interest rates... all those people in adjustable rate mortgages that are already crunched in their budgets. With skyrocketing home values, property taxes have gone up to keep pace with it... I know that our property taxes have gone up nearly $200 a month in the last 2 years... and we don't have an ARM. So I get that raising the interest rates will eventually cause more people to not be able to afford their homes and have to foreclose.

However, the whole point of an adjustable rate mortgage is that it is adjustable. There are usually limits on how much and how fast and ARM can adjust, but the whole point is that they do adjust. They are usually a very stupid idea, because you never know what the future can hold. Everything can seem rosy one minute, but anything can happen... especially when it comes to the economy.

If they don't raise the interest rates and inflation for the things you have to buy continues to skyrocket, everybody will suffer... including the people with ARMs. If they do raise interest rates, maybe the government can keep the dollar from freefalling and maybe we can curb inflation. Course raising interest rates will probably send the housing market into a tailspin and create a lot of foreclosures.

What a choice. Inflation and a weakening dollar, or the housing market going into a tailspin. Tough call.

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