By clicking “Accept All”, you agree to the storing of cookies on your device to enhance site navigation, analyse site usage, and assist in our marketing efforts. View our Cookie Policy for more information.

What is Inflation?

November 24, 2022

What is Inflation?

November 24, 2022
To comply with the regulations outlined by the FCA, some articles we post are only available to our members. To read this and others like it, please sign in.

What is Inflation?

Inflation is an increase in prices that result in a loss of buying power over a period of time. Every month, the office of national statistics will check the price of several items and services the average person would use. 

This includes over 700 items like bread, a bus ticket, a family car and yearly holiday. The price of the basket of items and services provides the consumer price index (CPI) 

To get the rate of inflation, they compare the CPI from the current price to the year before, the change in price level over a year is inflation. The Bank of England has a handy inflation calculator you can use. 

What drives inflation? 

Demand-Pull Inflation 

Demand-pull inflation causes prices to increase due to a shortage in supply. An increase in production demand can also lead to this type of inflation. 

This demand increase can be caused by a rise in employment as employers try to increase their production and service output. A tight labor market results in wage increases and then leads to greater demand. 

Cost-Pull Inflation

Also known as wage-push inflation will happen when prices increase as a result of the increased cost of wages and raw materials. The higher costs of production can decrease the amount of total production within the economy. 

As demand for goods hasn’t changed, the production cost increases are passed on to consumers, which is known as cost-push inflation. 

Built-In Inflation 

As both demand pull and cost push inflation takes place, employees could begin asking for a pay raise. If employers don’t keep employee wages competitive, this can result in a labor shortage. If companies look to maintain profit margins but raising prices alongside salaries, that would be classified as built-in inflation. 

How Does Inflation Affect Real Estate?

In times of high inflation, real estate investors can expect to see a range of increases in prices across multiple areas. 

In times of inflation, mortgage rates will most likely increase as interest rates tend to follow inflation rates. Meaning that mortgage providers will need to increase mortgage rates to maintain their interest margins, making property ownership out of reach for many people. 

The central bank will raise interest rates in order to dampen down inflation, consumers will tend to save more rather than spend and the hope is that with less consumer consumption, inflation will then ease. 

It can also lead to higher asset prices. Real estate assets will likely increase with inflation, this however puts downward pressure on demand because debt becomes more expensive.

As materials get more expensive, construction costs will go higher, developers will be less inclined to start new developments and current projects might need to be abandoned or increased in price when complete. These are just a few examples of how real estate can be affected by inflation. 

As inflation tends to lead to higher rent and prices of assets, real estate is considered to be a hedge against inflation. This is down to three things:

  1. Rents rising with inflation
  2. The value of your property rising with inflation
  3. The debt on your asset may be devalued as the value of that debt decreases (if the debt has been taken on a fixed interest rate prior to the rate increase). 

It is worth to note that variable rates would of course change with fluctuating interest rates, as a result of higher inflation levels the interest rate would increase. 

The cost of borrowing increases, which means downward pressure is put on cash flow and demand for real estate if you want to sell. 

Who is Hedgehog? 

At Hedgehog we’ve built an app that helps eligible individuals invest in the world around us; gaining exposure to real asset investments from real estate to renewable energy. Our in-house team has investment expertise gathered at the likes of Goldman Sachs, Partners Group and HSBC as well as product and engineering expertise honed at Monzo, Revolut and IBM, which has enabled us to build an application that offers the kind of user experience we believe in today's modern consumer demands. Learn more about Hedgehog.

Disclaimer

Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.‍