The financial woes of the US continue to worsen, with news from overnight showing the country’s inflation rate has reached a 40-year high.
According to the United States Government’s Labour Department, America’s CPI in January increased by a whopping 7.5 per cent compared to 12 months ago.
The jump represents the cash rate’s single biggest year-on-year increase since February 1982.
This comes less than eight months after US President Joe Biden promised Americans that inflation was a transitory, short-term issue.
“As our economy has come roaring back, we see some price increases, some folks have raised worries that this could be a sign of persistent inflation, but that’s not our view,” President Biden said on July 19, 2021.
“Our experts believe the data shows that most of the price increases we’ve seen were expected and are expected to be temporary.” As a result of the US’ dizzyingly high inflation, 10-year bond yields shot past 2 per cent for the first time since 2019, while Wall Street took a significant hit, with the S&P 500 giving back 1.8 per cent on Thursday.
According to Shane Oliver, AMP Capital’s chief economist, the US’ increased inflation rate could mean America’s Federal Reserve has to be more assertive with interest rates rises this year.
“What it does do [America’s increased CPI] is push up the global cost of borrowing, so higher inflation in the US probably will mean the fed will have to be more aggressive in raising interest rates this year,” Mr Oliver said.
Mr Oliver added the resulting effects on long-term bond yields could send fixed-term interest rates in Australia even higher.
“Overnight, we saw that [America’s increased CPI] put more upwards pressure on long-term bond yields in the US, which in turn has the effect of pushing up our long-term bond yields, because it’s part of a global market, which in turn has a flow-on effect to fixed mortgage rates,” Mr Oliver said.
“And if fixed rates continue to rise, which seems likely, then, partly because of the high inflation numbers in the US, that’s going to mean ongoing upwards pressure on our fixed rates here.”
What it means for Australia
Because of this, Mr Oliver said there was still a solid argument to be made for homeowners with mortgages to fix interest rates in the immediate future.
“I think there’s still a case to consider fixing, because fixed rates are still pretty low and you’re still able to lock in at, depending on how long you’re fixed for, you can still get deals in the low twos,” Mr Oliver said.
“They’re still pretty low numbers; I mean the standard variable mortgage rate, or the discounted mortgage rates that people are paying are typically around three per cent.
“And they’re [variable interest rates] likely to start rising later this year, so when the Reserve Bank does start to raise interest rates, then you’ll start to see variable rates rising.
“So if you can lock in for two or three years at maybe 2.5 per cent or even less, if you shop around and get a good deal, that may still be a better bet where you end up with a lower rate over the next three years than you would if you go variable.”
This was backed up by words today from Reserve Bank governor Philip Lowe, who cautioned that the notion of raising interest rates prematurely could negatively impact unemployment figures.
“I recognise that there is a risk to waiting but there is also a risk to moving too early,” Dr Lowe told the House Economics Committee this morning.
“Over the period ahead we have the opportunity to secure a lower rate of unemployment than was thought possible just a short while ago,” he said.
“Moving too early could put this at risk.”
However, Mr Oliver believed that news from the US wouldn’t necessarily rush the Reserve Bank of Australia (RBA) into increasing interest rates at an accelerated rate this year.