US inflation is running hot; how it could impact Aussies

Highlights

  • Currently, the US inflation stands at 7%, highest since 1982.
  • US is the world’s largest economy and anything that happens there, triggers a ripple effect on several other economies.
  • With the interest rate regime starting to shift on the upside in the US, the increasing cost of goods and services will almost surely be passed on to consumers.
  • The shortage of supply parts and excessive delays in shipments will all add up to the cost of product.

Inflation in the US has rocketed to a four-decade high mark of 7% -- its highest level since 1982. The runaway prices of commodities, soaring household expenditure and a wreaked supply chain are putting pressure on the Federal Reserve to start tightening its monetary supply from this year.

Inflation

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Inflation has become one of the major challenges for the countries across the globe. During the last quarter of 2021, banks started to increase interest rates in order to curb inflation, but some experts still believe it might continue to rise well in 2022.

So how would Australia be impacted if US inflation keeps running hot?

“When America sneezes, the world catches a cold.” This old adage stands true even in today’s world. Being the world’s largest economy, any event in the US tends to generate a ripple effect on several other nations is kind of true!

There is little doubt now about the Fed’s imminent move, as it is likely to hike rates sooner than expected, which will make the borrowing cost more expensive. But talking specifically about Australia, the banks here still access international funds. If the funds become more expensive to access, the additional cost will likely be passed down to the ultimate consumers. Therefore, Aussies can expect a hike in mortgage rates as and when the US Fed plans to hike rates in their country. 

Aussies also buy commodities from the US, especially electronics such as smartphones and laptops. With the US interest rate regime starting to shift on the upside, the increasing cost of goods and services is almost surely not going to be absorbed by the manufacturers. Here again, the additional cost would be borne by Aussies for imports from the US in a rising interest rate environment.

The wreaked supply chain would make matters worse. The shortage of supply and excessive delays in shipments will all add up to the cost of product. Although, the supply chain crisis is a global issue and is difficult to rectify by tweaking internal policies of a country, it will surely be a double whammy for consumers on the cost of products when interest rates rise.

Omicron, the latest threat, is also becoming a challenge for the central banks. Battered economies need more monetary stimulus to be revived but that catalyses inflation as well. Therefore, if the economies start to suffer again due to Omicron, then interest rate hikes might be held on for some more time.

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