Inflation tops mortgage rates, a first in 41 years

For the first time since 1980, the cost of living is rising faster than the average mortgage rate.

The Consumer Price Index for April tells us U.S. inflation is growing at a 4.2% annual pace, the largest jump since the bubble days of 2008. Meanwhile, Freddie Mac’s rate for a 30-year mortgage averaged 3.1% in the same month, a smidgen above record lows.

That puts the cost of home loans at 1.1 percentage points below inflation. Let my trusty spreadsheet tell you how topsy-turvy that really is: Over the past half-century, mortgages were an average 4 percentage points above the inflation rate — though that gap’s been halved in the past decade.

Inflation rates topping mortgage rates have happened in just 34 of the 601 months — that’s 50 years — since this loan index started in 1971. That’s just 6% of the time.

The last occurrence was August 1980, when inflation was an ugly 12.9% and mortgage rates were 12.6%. Yes, it was a very different era, but let’s not overlook April’s flip-flop.

Remember, economic theory says loan rates should be above the inflation rate. Why? Because lenders want to get paid back the dollars they gave out, plus collect interest at a rate that exceeds the growth of the cost of living.

Fed fingerprints

Who’s to blame for this financial curiosity? Largely, it’s the Federal Reserve and its efforts to help the economy emerge from its pandemic pause.

The Fed’s mission involves a tough juggling act: keep inflation mild and employment high. It’s not easy. No inflation is bad, too.

The central bank in the past year used its powers to aggressively create historically low interest rates as a pump for a stalled business climate. Now, the Fed’s ignoring recent inflationary hints that its policy created — including soaring prices of some commodities, not to mention homes and stocks — while taking a risky route to fully restore the economy.

Inflation upticks like April’s CPI are seen by the Fed as “transitional” — temporary fallout from the sharp bounce out of the recession the pandemic created. The Fed plans to accept inflation well above its 2% ceiling that previously might trigger rate hikes.

But this isn’t simply an academic debate. Too much inflation is also an economic headache, too. It can smash consumer buying power and be a heavy burden for lower-income households.

Meanwhile, the Fed’s cheap money has aided wealthier groups, such as homeowners. Bargain financing lets owners refinance to lower payments. It also gives house hunters the urge — and cash — to push home prices up to record highs.

More than one month

It’s not just April.

National inflation averaged 2.1% the past six months vs. 1.7% in the five years before the pandemic throttled the economy.

California’s slow economic rebound has kept inflation down, to date. Bay Area inflation is 2.5% compared to a 3.2% five-year average. Los Angeles-Orange County’s inflation has been 1.7% last six months vs. a 2.6% five-year average. 

So what’s driving the cost of living up? Drivers know one factor.

The CPI says gasoline nationwide is up 50% in the year ended in April vs. an average 0.6% increase in the previous five years. In L.A.-O.C., gas is up 36% vs. a 1.1% five-year average. In the Bay Area, pump prices rose  38% in a year vs a 2.3% five-year average.