gripped it. As a result, traders began trading in bonds anticipating higher interest rates as a result of higher inflation. Treasury bonds reached a high of 7 percent in mid 1993, then fell again to 6.9 percent (Teitelbaum, Neumeier & Welsh, June 28, 1993, p. 20).
Bonds increase during periods of inflation because interest rates increase, moving money out of stocks and into the higher yielding bonds. As such, bonds can provide a signal to investors and others that inflation may be starting up again.
During 1993, inflation measures began moving up. The Commodity Research Bureau Futures index, which tracks the futures prices of raw materials, rose 6.5 percent in two months. The stock market largely ignored warnings of inflation during 1993, but some analysts moved their clients out of stocks, anyway (Kuhn, April 19, 1993, p. 29).
During the first part of 1994, the Federal Reserve increased interest rates in an effort to keep inflation under control. Inflation was increasing at under 4 percent per year, and the Fed increased interest rates by one-half of one percent within one quarter (Wessel, February 7, 1994, p. A1).
Inflation has a mixed effect on real estate. Mortgage rates increase during periods of inflation because interest rates increase. As a result, home buyers and other real estate investors have more difficult times obtaining the necessary capital for real estate investments.
However, inflation also drives up the price of real estate, particularly in areas where economic growth is especially high. Thus it may be possible for real estate investors to realize a profit on their investment if they are able to obtain a return higher than the cost of capital.
Real estate is also a contributor to some of the measures of inflation, and to the causes of inflation itself. For example, home prices were strong in the high-growth (high-inflation) years of the middle and late 1980s, but fell after the recession h...