Two numbers that will spell serious pain

TWO numbers, spread over half-aday and half the planet, define your financial future. Just before midnight Wednesday our time, the latest US inflation numbers were released in Washington.

They showed inflation kicking up to 9.1 per cent, the highest it’s been in more than 40 years.

Around 12 hours later, just before midday Down Under, our latest jobs and jobless numbers came thundering out of Canberra from the ABS.

And they sure came thundering: they showed the lowest unemployment number in nearly 50 years – 3.5 per cent.

Perhaps even more – very positively – startlingly, there were almost as many vacancies as there were people looking for work.

Theoretically, we could have taken the jobless number down to zero.

I can’t remember ever seeing that before. But.

The rampaging inflation in the US should force the Fed, their version of our Reserve Bank, to deliver bigger and quicker interest rate hikes.

It will certainly mean a 75 point hike at the Fed’s next meeting in a fortnight; some commentators are now speculating a full 1 per cent.

Those rate hikes – I use the word deliberately again - should send Wall St plunging.

Our market would follow and your super would take another hit like it’s just had this last financial year. Indeed, a much bigger hit.

But Wall St traded reasonably placidly through a whole day after the inflation news.

The Dow dropped only 200 points, barely half a per cent; and while, yes, the futures as I wrote this ahead of the overnight Thursday open were pointing down, they were pointing only down, again, modestly.

Part of this is that Wall St is punting, indeed Wall St knows, that if the Fed sees the Street plunging or likely to plunge, 2008-style, on its interest rate hikes, it will back off.

Part of it is more immediate: that the inflation over the past year and the booming US economy will deliver strong corporate profits, with June quarter reporting kicking off right now.

So the Dow is a tug-ofwar between the reality of today profits and tomorrow expected rate hikes – backdropped by a confidence that the Fed won’t really hurt.

The – humungous – problem with that combination of stupidity and cynicism and plain old Wall St greed is that a Fed that fails to take the tough actions needed will dump the US in an even bigger disaster of 1970s-style raging inflation and double-digit interest rates or stagflation.

Which is just exactly what happened to us after the jobless number was last this low, in August 1974.

We headed into 20 years of double-digit inflation, double-digit interest rates and a jobless number that peaked at 11 per cent and stayed high for years.

At the end of the month we are going to get the June quarter inflation numbers.

They won’t be as bad as the US, but they will see a jump from the 5.1 per cent recorded over the year to March.

That had a lot of Covid lockdown-driven lowinflation history in it.

The full-year number will be closer to 7 than 5.

But the inflation for the June half, annualised, will go over 8 per cent – not that far below the US number.

Not surprisingly, because it’s been driven by exactly the same factors: Covid and the Covid aftermath, and the Ukraine war, wrapped up in those ludicrous zero interest rates and multi-trillion dollar money printing.

The lowest jobless numbers in nearly 50 years together with the higher inflation numbers in more than 30, locks in a 50 point rate hike from the RBA in early August.

Arguably, it should be 75 points; and more to come.

That will send property prices south, taking back some of the huge price rises of the past five years.