The conflict between Russia and Ukraine is a long way away from Australia in a geographical sense. But financially, it’s hitting much closer to home.
One of the great modern international weapons in any warlike situation is the ability to economically sanction other countries. And with Russians cut off from the parts of the west that they like- banking, trade, investment, brands and even fast food- the people inside the country find themselves without money and plenty of other things they need.
So what does that have to do with Australia? Well if you filled your car with petrol recently, you might have noticed your bill was close to double what you were used to paying.
That’s because a lot of our oil and energy came from Russia, so when we said “no thanks”, along with most of the rest of the world, we had to start getting it from elsewhere. And the limited supply sent prices soaring.
RBA governor Philip Lowe said he believed the surging commodity prices would put a rocket under global inflation.
Meanwhile back at home
While the horror has been playing out in eastern Europe, back home we’ve had some troubles of our own. Much of the east coast of Australia was flooded in recent weeks, with unprecedented rainfall devastating entire towns, cutting off supply lines and resulting in a major shortage of food.
And less food at the supermarket means…you guessed it, soaring prices.
So here we are, with our own inflationary boost to go along with the one coming from overseas.
But how bad is it and what can be done?
Well for context, Lowe notes that our headline inflation rate here of 3.5% is less than half that of the USA, while other nations are also experiencing much faster rates of inflation.
So this allows the RBA to continue doing what it likes to do…take a seat and see how things play out for a while.
Interest rate rises?
Over and over again the RBA has said it doesn’t intend to raise the official cash rate this year or next year, though recently Lowe began changing his tune a little and hinting he was leaving the door open to a potential rate hike this year.
A number of economists, especially those working for banks, have predicted multiple rate rises this year and for the next two years after that. They point to the gathering inflation storm as something that must force the RBA’s hand.
The problem with that is that if people are already being slugged a packet for petrol and food and are then suddenly forced to pay extra on their mortgages, they might batten down the hatches and refuse to spend money on anything else, which would then have a serious effect on the Australian economy.
Ironically, it might be some of the aspects of rising inflation that make interest rate hikes unnecessary.
Protect yourself and your wealth
If rates begin to rise and inflation takes hold, you will find that every day your cash is worth less and less. But you can hedge against that outcome by taking the cash you have and using it to invest in assets.
Traditionally people have used gold as a safe haven investment, but investing in gold can be complicated. If there’s one asset class we know and love in Australia, it’s property.
And real estate is one of the best assets you can have when prices begin to rise. Not only does an investment property have real, physical value, guaranteed by the fact that people are always going to need places to live, but it also makes you an income that is tied to the inflation itself.
As the value of your property and also its rental income continue to rise over time with inflation, the debt you owe on it stays the same or goes down.
Arming yourself with these assets as inflation ramps up may just see you emerge on the other side in a pretty handy position.
But how do I get started?
Book in a FREE Discovery session with an Investor Relations team member to see how we can grow your wealth in uncertain economic times.
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