As the world emerges from the COVID-19 nightmare, at vastly different speeds and scales, novel and pre-existing economic problems could have a pronounced impact on future prosperity. The world is currently facing a trillion dollar inflation conundrum, and not a single nation or industry sector can remain insulated. From governments and businesses to private investors and households, the current outlook for inflation represents the most disruptive economic threat in many years.
In order to understand the current state of global inflation, it's important to get some context. Developed world economies and their central banks have experienced very low inflation since the 2008 financial crisis. For most of that period, people have been worried about disinflation and central banks have made multiple attempts to ignite a spark. When inflation does occur, central banks are forced to raise interest rates, which in normal times, has the intended effect of dampening the gears of economic growth.
While moderate inflation brings new investment opportunities and stimulates movement, excessive inflation is a significant threat to growth and social stability. It undermines the value of savings and currencies, increases the cost of living, and reduces productivity through increased wage and salary costs. However, due to the novel nature of the current economic situation, inflation could prove to be even more problematic when it does kick back into gear.
COVID-19 has expanded an already swollen global debt environment, and stretched resources to their very limits. A lot of things will be put at risk if inflation occurs earlier than expected. The current situation exists due to disparity between monetary and fiscal policy, along with growing economic inequality both between nations and within them. If inflation grows faster than expected, or before we're ready to adjust, every single sector of the economy would be affected.
At the moment, central banks around the world are striving to create a situation where there is just enough inflation. They are aiming for around 2% on average, which is the standard 'Goldilocks' range of not too warm and not too cool. This is difficult to manage at the best of times, however, let alone as the world emerges from a 1-in-100 year pandemic. The March US CPI is already at 2.6%, which is the highest rate since 2012. It continues to rise faster than expectations, with core inflation also way ahead of forecasts.
While at home inflation is currently within the limits set by the Reserve Bank of Australia (RBA) it is seen as the key economic metric along with employment numbers that is driving our recovery.
Even closer to home - your home - the key drivers of your home loan interest rates will be inflation and employment (or under employment) figures. If inflation moves up at a pace the RBA is not comfortable with we could see our mortgage rates start to rise.
For the moment the RBA is sticking to its commitments to keep mortgage rates low and hold the 0.10% cash rate. However, this is only until 2024. If you are considering fixed rates it will be important to watch what the longer term fixed rates are doing. Stay tuned as we consider these developments in coming weeks.
If you would like to discuss fixing your home loan at 1.90% (or there abouts) or your investment property at 2.39% (or there abouts) please contact hello@bluezinc.com.au or arrange a Zoom or face to face meeting here.
The world is currently stretched to its limit, with a shortage of containers, computer chips, and numerous manufacturing goods already slowing down entire industry sectors. Amidst a backdrop of uneven vaccination rates and growing tensions between China and much of the world, any small divergence away from 2% may have larger effects than anticipated. Leading financial experts disagree about how to tackle this growing problem, with the global pandemic continuing to confuse economic forecasts.
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