5 Myths About Inflation: The Truth Behind Rising Rates It can be helpful to look at what we know-and don't know-about inflation. Following are common misconceptions surrounding periods of high inflation, along with the truth behind these myths.
This story originally appeared on The Epoch Times
The U.S. consumer price inflation rate hit a 13-year high in June 2021, reaching 5.4 percent. The rate remained the same in July 2021, indicating an increase in prices of 5.4 percent compared to last year. The cost of food, both at home and away from home, inclined, along with new vehicles and living spaces.
Perhaps what is more worrisome is a look at the inflation rate's climb throughout the year. In January 2021, the rate stood at 1.4 percent; it creeped up in February and March, leading to 4.2 percent in April and then 5 percent in May. Given the upward trend, the question remains: will inflation continue to increase? And if so, by how much?
Inflation rates between 5 and 10 percent typically cause concern, as consumers might find themselves scrambling to pay bills and uncertain about the future. Rates above 10 percent can stall economic growth. Given the unknown factors surrounding the pandemic and the economy, it may be hard to accurately predict what will happen to the inflation rate in the coming months.
To provide some clarity, it can be helpful to look at what we know—and don't know—about inflation. Following are common misconceptions surrounding periods of high inflation, along with the truth behind these myths.
Myth #1: Real Estate Always Protects Against Inflation
Real estate, during times of high inflation, can be a mixed bag. If you currently have a mortgage with a low fixed interest rate, you may be in a good position. The value of the home might increase to reflect an upward trend in the housing market. You'll be able keep your payments the same, however.
For landlords, the situation may not be as rosy, especially if the government places limits on rent increases. "This means that a property owner ends up facing rising operating costs and no increased revenue, causing a disaster for them," Michael Denny, a Chief Investment Officer who runs The Investment Nerd, told The Epoch Times. For homebuyers looking to take out a mortgage, higher interest rates can make taking out a loan more expensive.
Myth #2: Higher Gas Prices Indicate Steep Inflation
It's easy to pull up to the pump, see a higher cost for gas per gallon, and assume prices have risen across the board. "Inflation rates are designed to measure how prices for many commonly used good and services are changing overall," Dr. Krieg Tidemann, assistant professor of economics at Niagara University, told The Epoch Times. This holistic approach looks at other living expenses, such as shelter, homes, and travel. For instance, suppose only gas prices were increasing during 2021, and the prices of other goods were remaining the same. In such a case, "the current inflation rate would be much lower," Tidemann said.
Myth #3: Prices Will Double Every Few Months
During economic crises at certain times in history, such as in Germany after World War I, prices have doubled within days—or even hours. That said, in general, prices tend to increase at a slower rate. This also implies that any savings you have won't automatically evaporate as you spend more of your budget on goods and services. "It will take more time for those who are paid in the local currency to see all their savings disappear into thin air," Jenna Lofton, a Certified Financial Advisor and Founder of Stock Hitter, told The Epoch Times.
Myth #4: Inflation is Inevitable
While it is true that inflation has taken place during the last decades in countries such as the United States, there have also been years in the past when prices didn't increase. "If you look throughout history, you will find there are long periods of time where there is low or no inflation," Denny said. There have been instances, for example, when the purchasing power of the dollar remained steady, especially when it was backed by gold. "Making money something outside the control of a central authority allows it to more accurately reflect the reality of the economy in which it operates," Denny said. When this occurs, "in general, it means inflation goes away," Denny added.
Myth #5: High Inflation Equates High Interest Rates
"Inflation and interest rates are not the same thing," Chris Panteli, founder of the personal finance website Life Upswing, told The Epoch Times. "Interest rates are actual rates that people charge for using their money." If you take out a loan, for instance, it might come with an interest rate of 10 percent; the same holds true for other financing options like credit cards and lines of credit. Inflation rates, on the other hand, measure how much prices are rising.
High inflation may lead to higher interest rates, just as low inflation may result in lower interest rates. In the past, during times of high inflation, the Federal Reserve has raised interest rates. When this occurs, borrowers typically take out fewer loans to avoid high expenses. When inflation is low, interest rates may be lowered to spur on investment spending.
By Rachel Hartman
Rachel Hartman is a freelance writer with a background in business and finance. Her work has appeared in national and international publications for more than 10 years. She resides in Miami and travels frequently.