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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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November 20, 2006


Worrying About Inflation

What worries you most:  That the immediate future will bring slower than desired growth or higher than desired inflation?  If you answered "inflation", you are not alone.  Here's what the world's finance ministers and central bankers had to say after putting their heads together this past weekend:

G-20 members noted that the world economy continues to expand at a solid pace, with growth above its long-term average for the fourth consecutive year. The outlook remains positive. Global economic growth is expected to slow slightly from the rapid pace of the past few years... Above average growth in the global economy has seen spare capacity decline which, combined with buoyant energy and mineral prices, has increased the risks to inflation.

Maintaining strong world growth and containing inflation will require ongoing adjustments to monetary and fiscal policies while ensuring appropriate exchange rate flexibility and structural reform.

And then there is this, from Bloomberg:

Accelerating wage growth around the world is making central bankers less willing to cut interest rates than some investors expect. The concern: The increasing labor costs may trigger a renewed rise in inflation even as energy prices abate.

"Wages are creeping up,'' former Federal Reserve Chairman Paul Volcker told the Concord Coalition, a fiscal-policy watchdog group, in New York Nov. 14. When it comes to inflation, Volcker said, "we're a little bit on the edge.''

In the U.S., unit labor costs rose last quarter at the fastest pace in almost 25 years. Germany's largest steelmakers, ThyssenKrupp AG and Salzgitter AG, are giving workers their biggest pay raise in more than 10 years. New Zealand wages increased at a record pace in the third quarter.

There's more to come. The International Monetary Fund expects unit labor costs at manufacturers in advanced economies to chalk up their biggest increase in six years in 2007...

ECB President Jean-Claude Trichet told reporters today central banks shouldn't be "complacent'' about inflation risks...

"The main risk to the inflation outlook in the medium term surrounds the behavior of pay growth,'' Bank of England Governor Mervyn King told reporters in London Nov. 15.

The article does note that there is controversy about how well labor costs predict inflation, but the general message is pretty clear:  If you ask the world's policymakers what is making them itchy at the moment, the answer is the prospect of too high inflation, not too little economic growth.

November 20, 2006 in Federal Reserve and Monetary Policy , Housing , Inflation , Labor Markets | Permalink

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Comments

In the US anyway, labor costs may be increasing due to inflation rather than the other way around. With the hottest sectors cooling this "inflation" seems unlikely to last.

Posted by: Lord | November 20, 2006 at 02:40 PM

After three years of raging inflation in housing, commodities, executive pay, equities, and corporate profit margins, economists are now concerned that we really have inflation as worker wages are beginning the long road to catching up. This is a profession in need of a makeover.

That central bankers are finally mumbling aloud about something the general poulation has been aware of for years is amazing. A true case of it ain't real till the fat lady says it's real.

What is truly amazing is the amount of counterfeit currency these clowns have dumped (and continue to dump)on the world while feigning surprise that inflationary expectations have become rooted. Some say Milton Friedman passed away from age related issues. Others think it may have been something else..........

Posted by: zinc | November 22, 2006 at 05:44 AM

I would worry more about transparency in the measure of inflation :). More here:

http://www.eurotrib.com/story/2006/11/20/143350/23

Posted by: Laurent GUERBY | November 24, 2006 at 02:13 PM

I guess there is some controversy concerning wages and their relation to productivity as well, how quaint.

Posted by: self | November 25, 2006 at 04:08 PM

Investing in Forclosures..
One approach is to purchase a foreclosure that is under-priced and selling it immediately at a higher value. One way to sell homes for a higher value is to take back a mortgage. For example, let's say a house worth $100,000 is sold at a foreclosure to an investor for $50,000. The investor may put down 10 percent and assume or create a new mortgage for $45,000. The investor then advertises the property at a discount, say $80,000, offering 100-percent seller financing (remember, we're figuring that like houses are worth $100,000). The owner hopes to create a sense of urgency by under-pricing the house and pulling in buyers. If successful, the investor takes a promissory note from the new purchaser for $80,000. He has now created a $35,000 note for himself (The difference between the $80,000 sale price and the original $45,000 mortgage). The new buyer makes payments to the investor for an $80,000 loan and the investor makes payments on the original loan for $45,000. In real numbers, here's what it would look like. If the original loan is for $45,000 at 8 percent over 30 years, the principal and interest is $366.88. When the second buyer takes a note for $80,000, the investor may charge a bit higher interest since he's offering 100 percent financing (which is normal in the mortgage world). Let's say he offers an $80,000 loan, 9.5 percent over 30 years. The monthly payment is $672.68, creating a positive cash flow of about $306 per month. If the borrower stays in the house for 30 years, the investor will make $88,295 in interest and $30,000 in capital gains after he's paid his own interest on the first note for a total return of $118,295. Not a bad return on a $5,000 down-payment.

Keep in mind that not all mortgages allow an owner to "wrap" a second mortgage onto original loan. Most loans today contain a "due-on-sale" clause, meaning if the property is sold, the first trust must be paid off immediately. Wraparound financing is popular when investors purchase foreclosed Veterans Affairs (VA) properties as the VA allows wrap-around loans in such cases.

Posted by: Wally Smith | December 12, 2006 at 01:06 PM

A third approach is to purchase a foreclosure that is under-priced and selling it immediately at a higher value. One way to sell homes for a higher value is to take back a mortgage. For example, let's say a house worth $100,000 is sold at a foreclosure to an investor for $50,000. The investor may put down 10 percent and assume or create a new mortgage for $45,000. The investor then advertises the property at a discount, say $80,000, offering 100-percent seller financing (remember, we're figuring that like houses are worth $100,000). The owner hopes to create a sense of urgency by under-pricing the house and pulling in buyers. If successful, the investor takes a promissory note from the new purchaser for $80,000. He has now created a $35,000 note for himself (The difference between the $80,000 sale price and the original $45,000 mortgage). The new buyer makes payments to the investor for an $80,000 loan and the investor makes payments on the original loan for $45,000. In real numbers, here's what it would look like. If the original loan is for $45,000 at 8 percent over 30 years, the principal and interest is $366.88. When the second buyer takes a note for $80,000, the investor may charge a bit higher interest since he's offering 100 percent financing (which is normal in the mortgage world). Let's say he offers an $80,000 loan, 9.5 percent over 30 years. The monthly payment is $672.68, creating a positive cash flow of about $306 per month. If the borrower stays in the house for 30 years, the investor will make $88,295 in interest and $30,000 in capital gains after he's paid his own interest on the first note for a total return of $118,295. Not a bad return on a $5,000 down-payment.

Keep in mind that not all mortgages allow an owner to "wrap" a second mortgage onto original loan. Most loans today contain a "due-on-sale" clause, meaning if the property is sold, the first trust must be paid off immediately. Wraparound financing is popular when investors purchase foreclosed Veterans Affairs (VA) properties as the VA allows wrap-around loans in such cases.

Posted by: Wally Smith | December 12, 2006 at 01:07 PM

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