Yahoo Finance What rising US inflation may mean for Aussies in 2022
Inflation figures out of the United States recently made for eye-watering reading.
The US consumer price index, which tracks prices of goods and services in the country across a 12-month period, soared to 6.8 per cent in November – marking the biggest yearly jump in US inflation since 1982.
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As we reported last month, there are multiple reasons for this, but effectively the pandemic has driven strong consumer demand, while also causing supply-chain complications and labour shortages for many businesses and industries across America.
As a result, Americans are experiencing higher prices across the board on many staple items, and the experts are predicting they will continue to rise well into 2022.
So, what has this got to do with Australia? In the globally interconnected economy that we all live in, quite a lot actually.
Increased cost of borrowing
Although the Australian economy has very little, if any, impact on what happens in the United States, the same isn’t true in reverse. The old adage that “when America sneezes, the world catches a cold” is still true today.
The first reason for this is interest rates. Central banks around the world have for decades used interest rates to dampen inflation and, despite the US Federal Reserve keeping rates on hold in its December meeting, there is little doubt US rates will rise in 2022.
If this happens, the cost of borrowing money rises and, given Australian banks still access most of their funds from international markets, they too will be affected.
If our banks have to pay more money to borrow, it won’t be long before they pass on this cost to the consumer when they lend this money out.
So, expect mortgage rates to rise during 2022.
Higher prices to follow
It’s not only interest rates that are affected by higher US inflation. Many Australians buy goods and services from the US – Apple’s iPhone for instance is still the number 1 smart phone here in terms of sales - and this has only increased during COVID.
If prices are higher in the US, then the same products will be higher here over time. Companies like Apple aren’t known for absorbing costs without passing them onto the consumer.
In addition, anybody trying to buy goods from overseas in time for Christmas this year will know how difficult it is becoming to get what you want in the timeframe you are used to.
These supply chain issues – the ability of Apple and others to purchase the components needed to make their products – are also contributing to higher costs, and those costs increase further when having to ship them to far flung places... like Australia.
To make matters worse, the prospect of rising interest rates in America has seen the value of the US dollar increase by nearly 5 per cent in the past year, relative to our own currency.
Why does this matter? Well, it means that your Australian dollar buys less than it did 12 months ago for American products (and others that use the US Dollar as a default currency).
The result is effectively higher prices for products purchased from overseas, and the cost of holidays abroad (when we are finally allowed to go) will also be higher.
Is there a silver lining?
Despite the prospects of increased mortgage rates and higher prices for overseas purchases, it’s not all doom and gloom out there.
The increased demand for staff in many sectors of the Australian economy, brought about by labour shortages and the prospect of the Great Resignation, is likely to result in increased salaries for many Australians.
With higher salaries comes increased consumer demand, which is good news for Australian businesses. The question for 2022 will be how much of that increased spending power actually makes its way into the economy, as consumers juggle higher prices and mortgage repayments with a larger pay packet.
If consumer demand does increase in the coming months - which again will lead to higher prices - then the Reserve Bank may have to consider raising interest rates here to counter inflationary pressure in our own economy.
Given the RBA hasn’t raised interest rates since 2010, it’s unlikely they will be in a rush to do so. However, when (not if) they do, that could come as quite a shock to many homeowners.
There is much to consider as we move into 2022. Keeping an eye on US inflation figures may be prudent in the coming months. They might affect you more than you think.
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