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Inflating inflation

Scott Tong Jun 16, 2006


KAI RYSSDAL: The last few bursts of economic news have brought some up arrows. Just the wrong kind of arrows. Going up is the cost of most everything we buy. Also up, the cost of borrowing. You might recognize it as the economic double whammy called inflation. Prices go up, interest rates go up to make prices go down. Marketplace’s Scott Tong looks at what that means for you.

SCOTT TONG: For more than a decade, the notion of inflation as boogeyman has basically been a joke.

In the 1997 comedy Austin Powers, Dr. Evil threatens world leaders with nuclear blackmail. Thing is, he’s just been cryogenically frozen for three decades. And he’s thinking in 1967 dollars.

[ Dr. Evil in Austin Powers: “If you want it back you’re going to have to pay me . . . $1 million! (Laughter) “]

So the UN leaders laugh … and so did we. But these days, no one takes inflation lightly. Not even liberal economist Dean Baker.

DEAN BAKER: “I don’t consider myself an inflation hawk at all, but you’d probably have to go back to 1989-1990 to have a period of comparable inflationary pressure.”

So where are people feeling the pressure?

Take the Merrifield garden center just outside Washington. Bulldozers are moving giant piles of mulch.

Many price tags here are unchanged — $20 bucks for lady robin azaleas, $22 for a piece of flagstone. The hike is in delivery costs.

GENERAL MANAGER DAVID WATKINS: “Our delivery fees used to start around $35 and we’ve moved those up to $45. We were getting some surcharges from some of our suppliers, and so we had to.”

Prices are also rising for airfares and in healthcare, things like copays and premiums.

In most cases, Dean Baker says there’s nothing you can do about inflation. You can’t buy 64 haircuts before prices change.

One exception: home rental prices. Time to negotiate that long-term lease.

BAKER: “So if you have the opportunity to lock in a rent for say two years, which many landlords are happy to do, that might be a wise thing to do right now.”

Another person to talk to is the boss. If you’ve wanted to ask for that raise, ask now.

Here’s why: Inflation pressures get central bankers to hike interest rates, which slows the job market and pushes down wages. Baker says that’s coming. But right now, the job market’s still strong.

BAKER: “If you think you’re in a position now to get a pay increase, you know, get it while you can. Because six months from now the labor market may look very different.”

Where things already look different is borrowing. Interest rates are rising for loans tied to short-term rates.

GARY SCHATSKY: “Like credit card rates, sometimes car loans and certainly home equity lines of credit.”

That’s personal finance advisor Gary Schatsky of Objectiveadvice.com. It’s time, he says, to juggle your debt. Find a lower rate for it. If you have credit card debt, move it to home equity line.
Or take an existing loan and shop it around.

How? You could watch cable TV:

[ TV ads: Would you like to know how much cash you can pull out of your home? Homeowners, wanna get cash and simplify your bills? ]

Or you could shop online. Schatsky is old-school. He says start with your current bank.

SCHATSKY: “Give them a ring, regardless of what you’re paying, and say, can you do any better, I’m hearing about better rates out there.”

While you’re at the bank, look at where your cash is. Ditch the old 1 percent savings account and open up a money-market fund. It pays you 4 percent or more annually, and you withdraw whenever you want.

SCHATSKY: “That’s fantastic where you’re not having to invest in the stock market — which rumor has it has had a slightly bad week or two — and you’re not having to tie up your money for many years.”

Still, before you sign anything, watch for fees. Say you want to convert an adjustable-rate mortgage to a more reliable fixed-rate loan. Schatsky says in some cases . . .

SCHATSKY: “Going out and refinancing your entire mortgage would involve so much in closing costs — by that we mean legal fees, title charges and all the ancillary highway robbery that we call mortgage banking — that refinancing might not make sense.”

Where it does make sense, the point is to lock in what you can now. Because in a world of rising prices and interest rates now looks a whole lot better than later.

In Washington, I’m Scott Tong for Marketplace Money.

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