Inflation causing problems for homebuyers, has political implications

This is the second great eruption of inflation in my lifetime, with effects felt in Seattle and across the world.

Many things are more expensive and most wages aren’t pacing the increase in costs. As my colleague Paul Roberts recently reported, high interest rates and large demand for housing is causing many first-time Seattle homebuyers to look out of town.

The challenge for this cohort isn’t merely high mortgage costs. Child care and employment instability in many sectors, including tech, contribute to the desire to leave Seattle. The city is increasingly a renter’s market.

High prices and interest rates also fall hardest on millions of families with low or moderate incomes. People are taking on debt, falling behind on auto loans and credit card bills.

The first big inflation period, in the 1970s, was caused by two major elements: the oil boycott by Arab nations, which inflicted tremendous economic pain on western Europe and the United States, along with Federal Reserve policies that consistently favored higher employment at the risk of runaway inflation.

These policies, established with good intentions by a generation that lived through the Great Depression, miscarried badly. Inflation in the 1970s was triple the rate of the previous two decades.

Economists have spent years debating this inflation, which lasted from 1965 to 1982, for years with many other causes to blame. 

The rest of us, who lined up at gas stations hoping they didn’t run out of fuel, felt it more keenly. It was harder to purchase a house, harder for wages to keep up with ever-rising prices.

One result was then-Federal Reserve Board Chair Paul Volcker presiding over an inflation-killing program of interest-rate hikes starting in 1980. The result was the most severe economic contraction since the eve of the Great Depression. But when the economy came back in the mid-1980s, inflation appeared vanquished for good.

We entered a period that economists call “the great moderation” — with relatively strong growth but relatively low interest rates. Under the supposedly steady hand of then-Chair Alan Greenspan, the economy was steered through numerous crises at home and internationally. 

Few realized that Greenspan’s “easy money” policies and allowing bank consolidation were carrying unintended consequences.

Congress required that the central bank have a “dual mandate” — of keeping employment as high as possible while keeping interest rates as low as is sustainable.

Inflation is a natural occurrence from a growing economy. The federal Bureau of Labor Statistics offers a useful calculator for those nostalgic for seemingly low prices from decades past. Gasoline that cost 35 cents in 1960 is now $4.86 in King County..

Still, with all that was learned from the 1970s, it might seem surprising that we’d find ourselves in another great inflationary spiral.

The consumer price index shot up to 8% in 2022. This was “low” compared with the 13.5% in 1980, but still a shock for people who lived through the great moderation. One result was that the central bank raised its closely watched fed funds interest rates in 2022, peaking at 5.33% this past year, where it remains.

Today’s Fed chair is Jerome Powell, the first noneconomist to lead the central bank in nearly 40 years. Powell, appointed in 2018, has a background as a lawyer and investment banker. To be sure, economists aren’t a panacea. Arthur Burns, who led the Federal Reserve from 1970 to 1978, presided over that first explosion of inflation.

But it matters in times of crisis. Ben Bernanke, who served as Fed chair during the Great Recession, famously told Milton Friedman that he was correct that the central bank turned a serious contraction in 1930 into the Great Depression.

Bernanke handled the Great Recession skillfully, raising interest rates just enough to ensure it didn’t become a second Great Depression.

Today’s economy appears very strong, with unemployment below 4% for the past 27 months. In Washington it was 4.8% as of March, and 4.3% for the Seattle-Tacoma-Bellevue metropolitan area. Economists consider this “full employment.”

Still, inflation roared out of control during and after the pandemic. It has many drivers. Among them are the above-mentioned supply chain problems, the enormous stimulus injected into the financial system because of COVID and price gouging.

However it’s measured, housing prices in metropolitan Seattle are among the highest in history. The price of groceries, gasoline and other items are near record highs as well.

Paradoxically, this is largely the result of the hot post-pandemic economy, both here and nationally. But the trade war with China, instability in the Middle East, Russia’s invasion of Ukraine and even the bridge collapse in Baltimore that closed a busy port have been unhelpful.

As a result, the consumer price index for all urban consumers hit a record this past month.

The Fed’s insistence on keeping interest rates high is a risky tactic. The central bank came into 2024 hoping to lower rates. But Powell said the consumer price index seems frozen at 3%, while the Fed target is 2%.

It’s worth remembering that many of the recessions of the past century were caused by Fed missteps.

Also, inflation is a global phenomenon. But while the Bank of England recently reduced interest rates, the Federal Reserve is holding fast.

“We did not expect this to be a smooth road, but these were higher than I think anybody expected,” Powell said in a speech in Amsterdam. “What that has told us is that we will need to be patient and let restrictive policy do its work.”

Patience is something many people in Seattle and across the country lack. According to a 2023 poll by the Pew Research Center, inflation is among the biggest issues for respondents.

And the inflationary spiral may bring serious political consequences. One could be the election of Donald Trump.