Delawareans should not expect the price of anything to drop any time soon. Inflated food, gas, housing, and other living costs are here to stay for a while due to compounding crises around the world.
Speaking to the Delaware State Chamber of Commerce Wednesday, Federal Reserve Bank of Philadelphia president Patrick Harker said he is concerned that the cost of living could get out of hand.
Harker predicted inflation will remain elevated around 4 percent this year and GDP growth will be between 3 and 3.5 percent. Levels are not expected to return to target increases until next year at the earliest.
Harker said In the fourth quarter of last year, which coincided in part with the Omicron surge — national GDP grew at an annualized rate of 7 percent, with strong inventory investment and healthy demand for
capital goods. For the totality of 2021, U.S. GDP growth was a very healthy 5.7 percent.
“That this occurred in the midst of a deadly pandemic is quite a testament to the underlying strength of our economy,” Harker said.
The Consumer Price Index was up 10 percent annualized in February, and the Core CPI was up 6.2 percent. Harker said this is why the Federal Reserve Bank announced last month that they are raising the federal funds rate for the first time since 2018 by 25 basis points. Harker said this is not the first hike he expects this year as their data evolves.
“Russia’s invasion of Ukraine will add to inflation pressure, not only hiking oil and gas prices but other commodities, like wheat and fertilizer,” Harker said. “Delivery times remain elevated, and while there are some signs in the data that supply chain constraints are finally easing, we are not out of the woods yet. In response to a new COVID-19 wave, China is instituting hard lockdowns in major manufacturing hubs, further choking supply.”
‘Help wanted’ signs are not coming down any quicker in Delaware. Employment in the First State is just 14,000 jobs short of where it was pre-pandemic, but vacancy rates remain elevated at record levels.
Harker also noted that nominal wage growth has not been keeping up with inflation, but the waning of the coronavirus and uncertain equity markets will likely push people back into the workforce and predicts the unemployment rate will continue to fall.
“I do see the potential for a significant uptick in the service sector in many large cities that are only now waking up after a two-year pandemic-induced hibernation,” Harker said. “Central business districts in cities like New York, San Francisco, and Philadelphia should get a boost as more workers return to their offices. The rise of hybrid work may moderate the potential for a huge boom, however.”
As more Boomers retire, and younger generations are retiring early, Harker said that building middle-class jobs that don’t require a college degree are the key to bringing people off the unemployed sideline. He added that women took the brunt of unemployment hits, leaving many childcare positions open. Now, 25% of the state is in a childcare desert. Families cannot afford to pay for childcare, and childcare workers are being pulled away by competing labor markets.
Harker cited the high cost and low availability of child care as a primary road block that is keeping people from getting back to work. Additionally, people can’t afford to live where the jobs are, especially people trying to enter the housing market, because of loan modifications for existing borrowers.
“Our exceptionally strong housing market has kept home prices elevated," Harker said. "While this has had undeniably negative impacts on those seeking to enter the housing market, it does ensure that borrowers can avoid losing their homes.”
At the beginning of the pandemic, the CARES Act mandated that federal mortgage borrowers be granted forbearance. The Act also instituted a foreclosure moratorium, which ended at the end of 2021. More than 8.5 million borrowers entered forbearance and nearly 1 million mortgages are still seriously delinquent. Approximately 75 percent of borrowers in loss mitigation have not resumed timely mortgage payments. Refinancing applications among Black and low- and moderate-income borrowers was significantly less than the overall rate, which Harker said suggests a need for improved communication between these borrowers and their banks.
Harker said that borrowers that were able to resume timely payments, there are still options to modify them.
“A deferral creates a no-interest subordinated lien out of their missed payments, not due until loan payoff,” he said. “Meanwhile, loan modifications offer lower interest rates and extend loan terms up to 40 years while offering payment reductions of 20 percent or more.”
Harker also suggested that lenders consider solutions that limit the costs of modification while providing more payment relief to borrowers.
