Inflation builds over summer

Ian Rogers

INFLATION'S KING

Rising interest rates are associated with inflation and three-year fixed mortgage rates beginning with a 3 is a bell on the inflation bulge before us.

There was a whole of Westpac group upward move in the 5 to 20 basis point range across one to five year fixed rate loans on Friday. This takes the Westpac one-year rate to 2.39 per cent, up 5 bps, the 3-year rate to 3.04 per cent, up 15 bps and the hard sell 5-year rate of 3.59 per cent is up 20 bps.

Westpac of course is desperate for margin – and Westpac is STILL FOR SALE – but it’s the underlying bubbling up in interest rates across the curve both recently and all the more expected this morning that’s interesting here.

The Westpac rate hikes come “on the back of a spike in the cost of fixed rate funding and an expectation the US Federal Reserve will lift rates faster and more aggressively than previously anticipated,” RateCity’s research director, Sally Tindall wrote on Friday.

“The cost of fixed-term funding is rising with inflation in the US hitting its fastest pace in nearly four decades,” she said.

“We expect other banks to follow within days on the back of sharp increases to the cost of wholesale funding.

“Mortgage holders who were fortunate enough to lock in a record-low fixed rate over the last couple of years are immune to these hikes, but only for the duration of their fixed rate term” Tindall said.

‘Global stock markets record worst week in more than a year’ was an easy lead for the Financial Times this weekend.

‘GMO's Jeremy Grantham warns super bubble is bursting’, the ABC’s search engine optimisation is working, the ABC ranked by Google News at second.

‘Stock Markets Off to Worst Start Since 2016 as Fed Fights Inflation’, The New York Times headlined.

They mean:

‘.....    as Reserve Bank of Australia Fights Inflation’

or

‘‘.....    as we all fight or frolic with inflation’

It’s the frolic bit we need to be clearer about. Inflation is not really such an evil thing and inflation is to be relished in when it’s around.

Inflation may be around for a long, long, long time and at times interest rates will be toxic, but they may not be recessionary. Why should they be?

This is the epoch of the universal basic income and the decline and end of capitalism.

What will banks look like under socialism? A question not asked nearly often enough.

In construction, logistics and transport generally, inflation in Australia is not merely common but rampant. Into three figures, so many product and service categories even Woolworths will yield and pack on margin on top of margin. 

The RBA’s Trade Weighted Index at 60.4 on Friday is down from a February 2021 peak of 65 and if Australia is not an economy where rising landed prices find their way into the price structure fast and easy then this country is nothing.