Writing a piece on inflation brings to mind that Wet Wet Wet song (fabulously re-enacted in Love Actually) called Love is All Around - because inflation is all around us now.

We're feeling it in our fingers and in our toes, in the news and in the headlines, at the supermarket and in our energy bills and basically, everywhere we go.

OK, maybe I'm going too far writing an inflation blog based on a cringe-worthy '90s song - but suffice to say, we're all tired of inflation, am I right?

Let alone US inflation and what it's doing to our property market.

What is inflation?

We discussed Australian inflation recently and how it's affecting the Aussie property market but we'll skip back briefly to answer this question again.

The Reserve Bank of Australia (RBA) describes inflation as "an increase in the level of prices of the goods and services that households buy" and "is measured as the rate of change of those prices".

In the second quarter of 2022, our country's current inflation rate climbed to 6.1% in the second quarter of 2022 and is now at its highest point in 32 years.

Thankfully (!) this figure is still well below the RBA's most recent forecast of 7.75% in 2022, before a predicted drop to "a little above 4% over 2023 and around 3% over 2024."

Where is US inflation headed?

Unsurprisingly, US inflation figures are on the rise too with the Federal Reserve Board (the US equivalent of Australia's Reserve Bank) last setting this figure at 8.2% for the 12 months to September.

However, in some good news, the US Bureau of Labour Statistics noted this is the third month in a row that US inflation recorded a slow down with its current figure the lowest in seven months and comparing well to June's figure of 9.1% - the highest in four decades.

In comparison, June 2020 - when COVID began pummelling the globe - saw an inflation figure of just 0.6% while June 2021's inflation rate was 5.4%.

Indeed, US inflation rates only began to climb above 6% late last year as COVID headed back to the sidelines.

NB: an important side note: the US interest rate is currently 3.08% (as at the end of September). This is up 3% since January.

“When America sneezes, the world catches cold" - or does it?

So, there you have it: US inflation is high and so is that of Australia, for basically the same reasons as we discussed recently.

But how - and why - does US inflation our property market?

Firstly, as we've suggested earlier, Australia usually follows where the US and the UK lead, particularly in terms of economy, values, and opinions.

So, if US inflation rises, expect Australia's figures to increase too.

The value of the Australian dollar worldwide will also change and this, in turn, will affect the real-time dollar value of global goods and services.

Most importantly perhaps for both borrowers and vendors, rising inflation impacts how much Australian banks can borrow from the US and other global banks.

(No, our banks don't have a large vault of cash in storage that they lend to us but instead, borrow funds from international markets to lend to you and me).

So, you have Australian lenders forced to borrow fewer dollars from global banks, thanks to rising US inflation rates.

Alternatively, they can borrow the same amount but pass on the extra costs to borrowers.

One ABC article from November 2021 put it like this:

Higher US interest rates may translate into higher borrowing costs for Australians. That's because local banks and financial institutions borrow from US debt markets to finance many of their fixed-rate mortgage products. It's only one source of finance, but it is an important source.

The same article went on to summarise some thoughts from ANZ senior economist Adelaide Timbrell:

Australians about to take on fixed-rate mortgages will notice higher costs in the coming weeks and months, even if the Federal Reserve sits on its hands for months. That's because Australian lenders don't wait for the Federal Reserve to hike rates — they may jump the gun.

AMP Capital chief economist, Shane Oliver shared similar thoughts:

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.

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.

Or, in a nutshell, here's what Yahoo Finance had to say in December last year:

Keeping an eye on US inflation figures may be prudent in the coming months. They might affect you more than you think.

How can we remedy our American inflation cold?

Firstly, don't panic or get too depressed - even if you have a fixed-rate mortgage.

There's no doubt inflation is on the rise, as are our grocery and energy bills.

But you can't do much to control what's happening with either US or Australian inflation.

What you can do is stay smart and savvy when buying, selling or investing.

Do your research, talk to experts, talk to your parents about how they got through the 1980s and 1990s' enormous interest rate hikes, and grab advice from anyone who has just bought or sold.

Finally, don't forget to keep things in perspective and hold onto silver linings (yes, they're out there!)

As we said earlier, the majority of current mortgage holders and prospective buyers have never experienced an interest rate rise - that's good news.

We've also avoided some of Australia's highest ever interest rates which rose to a record-high figure of 17% in 1989.

The Barefoot Investor - otherwise known as Scott Pape - actually emailed his subscribers this week saying he was cheering on high interest rates.

He admitted this was just slightly unusual but his reasoning is this - and I agree with it.

High interest rates give people an incentive to save money.
They discourage people from speculating on dumb things.
They bring down house prices and give first-home buyers a fighting chance to get in.
And they help pensioners earn a few crumbs without risking all their money in the share market.

We essentially agree with Barefoot and followed this same reasoning in a recent article focused on how first-home buyers can benefit from high interest rates.

For example, high rates give these buyers more buying opportunities while boosting their savings.

Also, while higher interest rates mean higher repayments and less borrowing power, they also give buyers an increased incentive to pay off their loan ASAP.

At the risk of pushing the positivity angle too far, I'm going to quote PropertyUpdate's Michael Yardney's views (again) on overall inflation.

Booms just don't last forever, and neither do downturns.
So, think long-term and don’t seek quick wins.
And don’t listen to all those negative messages in the media.
It really doesn’t matter what the markets do in the short term as long as you have sufficient financial buffers to ride out the storm.
Downturns are just one part of a cycle, so they will always end at some point.

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