How Interest Rates and Inflation Differ in the US and UK

The rising cost of living can be very different depending on where you live.

Economic policymakers around the world are raising interest rates in an attempt to control the rising cost of living. Jerome Powell, the chairman of the Federal Reserve, reiterated his commitment to this policy in a speech yesterday. He warned against "premature" abandonment of inflation and promised to "stay the course until the job is done".

But rising rates and high inflation can have very different practical effects depending on who you are and where you live. Gasoline prices matter a lot more for people who travel long distances to get to work, for example. Higher interest rates are costing people who rely on credit cards to pay their bills, when they may actually be good news for retirees living off their savings.

In today's newsletter, I want to explore a stark example of these differences: the housing market on both sides of the Atlantic. In Britain, rising rates threaten to force some people out of their homes. In the United States, in some cases they prevent people from moving.

Early this year, the typical American buyer could get a mortgage with an interest rate of just over 3%, low by historical standards. Buyers today can expect to pay more than double in interest - more than 6.5% on average, the highest rate in more than a decade. In practical terms, for someone buying a $300,000 home with a 20% down payment, that's the difference between a monthly mortgage payment of $1,000 and a payment of over $1,500.

If you own a home in the US, chances are your monthly payment hasn't increased at all. This is because a large majority of homes in this country are purchased with 30-year fixed rate mortgages. If you locked in a 3% rate last year, your monthly payment will stay the same for the next three decades, no matter what happens with interest rates, house prices, or overall inflation.< /p>

In Britain, mortgage rates have also risen rapidly. But the impact of higher rates looks very different. This is because most mortgages have fixed rates for only two to five years. (Others have variable-rate mortgages that automatically change whenever the Bank of England raises or lowers interest rates.) As my colleague Eshe Nelson recently reported, millions of Britons expect their interest rates rise over the next year. Inevitably, some of them will not be able to afford the resulting higher payments and will be forced to leave their homes.

There is no doubt that , for most US homeowners, the stability their fixed-rate mortgages provide is a huge plus right now, effectively shielding them from the effects of high inflation and rising mortgage rates.

But not everyone comes out a winner. In the United States, you cannot take your mortgage with you when you move into a new home. As a result, homeowners who might have planned to move in the next few years – to trade in a bigger house, for example, or to downsize after the kids have gone to college – now have a strong incentive to stay put and hang on. to their low interest rate.

As a result, fewer people put their homes up for sale, which keeps house prices high even if the market housing slowed other measures. This means that anyone hoping to buy a first home now faces a quadruple whammy: there aren't many homes to buy. The houses available are expensive. Rising interest rates undermine buyer power. And if they don't buy, they have to keep paying rent, which also goes up.

As Roman Sustek, an economist at Queen Mary University of London, tell me, “In the United States, you're going to have winners — those are the guys with existing loans — and you're going to have losers, which are the new borrowers. In the UK, every...