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US inflation figures for January came out overnight, and they were another shocker.
Consumer price rises over the past year averaged 7.5 per cent, led by a massive 27 per cent surge in the cost of energy, particularly gasoline, as the Americans call it.
But even stripping out big rises in the cost of energy and food, US inflation was still running at 6 per cent.
Both are the steepest annual increases in prices that American households have had to face in 40 years.
US borrowers are now facing another potential rise in their cost of living, as their Federal Reserve plans to increase interest rates next month for the first time since December 2018.
Although most US households are tied in to long-term (generally 30-year) fixed-rate mortgages, so rising interest rates only affect them if they are buying a new property, or moving and refinancing.
Until last night, the Fed was widely expected to start raising interest rates gradually, by 25 basis points, from 0-0.25 per cent up to a target range of 0.25-0.5 per cent.
However, the even-higher-than-expected consumer price index (CPI) reading of 7.5 per cent now has markets betting on a 66 per cent probability of a 50-basis-point rate rise next month.
Does this mean Australian interest rates are about to rise?
Yes, and no.
Rising inflation and market interest rates globally — plus the end of some huge Reserve Bank programs to keep interest rates lower and provide cheap funding to Australia's banks — mean that three-year-plus fixed mortgages have already become much more expensive.
One- and two-year fixed mortgages are also starting to edge higher, as the timetable for our local Reserve Bank cash rate increases has moved forward.
However, discount variable rates are low, and some have still been falling with banks using these these products to chase new customers as fixed rates have become less competitive.
Although those variable rates will eventually start rising when the RBA's official cash rate target starts to rise.
We got a fresh clue today from Reserve Bank governor Philip Lowe about when that might happen from his testimony to a federal parliamentary committee.
Dr Lowe repeated comments from a National Press Club appearance last week that "it is certainly plausible … that an interest rate increase will be on the agenda some time later this year".
However, he added, a crucial extra detail on timing today.
The ABS releases the next consumer price index (CPI) reading for the March quarter in May, and the one after that for the June quarter in late July.
So, if the Reserve Bank governor wants to see at least two more CPI readings before raising interest rates, then it won't happen until at least the board meeting on August 2.
Why can the RBA wait longer than the Fed?
Quite simply, inflation is not yet as much of a problem here.
Inflation is rising in Australia too, but nowhere near as fast as the US.
Headline inflation in Australia was 3.5 per cent in the December quarter and the Reserve Bank's preferred measure that strips out the most volatile price moves was 2.6 per cent.
Both are less than half the rate of price growth in the US and the RBA's preferred measure has only just got back to the middle of its target range for the first time in Philip Lowe's five-and-a-half-year tenure as governor.
Given that Australia is subject to many of the global pandemic-induced supply chain disruptions that have pushed prices up in the US, why aren't we seeing similar inflation?
Inflation is 5.9 per cent in New Zealand, and at similarly high levels in much of Europe and the UK, so why is Australia an outlier?
""We have not seen the same increases in goods prices as has occurred in the United States," Dr Lowe explained.
"Rent inflation has also been lower in Australia than elsewhere."
The rise in renewables, including Australia's world-beating uptake of rooftop solar, plus ample domestic supplies of fossil fuels, such as coal and gas, have insulated Australia from the worst of the energy price hikes seen in other countries.
Closed borders have kept rents lower than they otherwise would have been, especially in certain areas (and the CPI only measures prices in the big cities, not in regional areas).
But a key factor has been the slow response of wages to rising demand for labour in Australia.
Dr Lowe said that is partly due to very institutional wage-setting mechanisms for many workers that are slow to respond to changing economic circumstances — for example, enterprise agreements that lock-in set pay rises for three years.
But it is also due to the lack of a "great resignation", such as has been experienced in the US and the UK, where a mass retirement of older workers has seen labour market participation drop and caused even greater demand, and wage rises, for the workers who remain active.
When, and how much, will interest rates rise?
No-one knows for sure, but the vast majority of analysts and the pricing of big money bets on financial markets suggests at least one rate rise in Australia is extremely likely this year, with expectations of two, three or even four before 2022 is done.
As noted above, Dr Lowe dropped a very strong hint that the first one will not come before August.
As for how far interest rates are likely to rise, that is even less certain.
Some well-regarded bank economists expect the cash rate to max out at 1.25 per cent.
Others believe it will get back above 3 per cent, which was, it must be remembered, the "emergency low" it reached during the global financial crisis.
As for Dr Lowe, he is certainly aiming for the latter.
"One would hope that, over time, real interest rates would return to positive territory," he told the committee.
Interest rates at those levels would deliver "positive real returns to savers".
However, Dr Lowe acknowledge that such rate rises would come as a "shock" to many recent home buyers who have known nothing but declining interest costs.
"The vast bulk of people who've taken out mortgages have not had an increase in interest rates because of a tightening [by] the Reserve Bank," he observed.
"So, I'd imagine, when the time comes, that will be a shock to people who've only got used to their mortgage rates falling."
If variable mortgage rates followed official moves, a 2.5 per cent cash rate would see the average rate being paid by borrowers rise from just under 3 per cent to 5.36 per cent.
What will happen if and when mortgage rates rise above 5 per cent?
In short, no-one knows, including the Reserve Bank.
Committee chair, Liberal MP Jason Falinski, asked Dr Lowe if the Reserve Bank had done any recent modelling to estimate the likely effect on borrowers of the cash rate rising, given that the last rate rise was in November 2010 and household debt levels have increased significantly since then.
Dr Lowe said the bank had done a lot of research in the past about how rate rises affected households, but nothing specific about the current situation.
He said, however, that there would be a few competing forces at play.
Along with the shock of the first rate rise in about a dozen years, he noted that the increase in the level of debt was expected to make household spending — and the 60-odd per cent of the economy based on it — much more sensitive to rate rises.
"The level of household debt relative to income is at a record high. So, the stock of debt that the higher interest rates will apply to has increased," he observed.
"In and of itself, that will make a tightening of monetary policy more effective."
However, he added that, during the pandemic, Australians had built up about $250 billion in extra savings than they had before COVID-19, including a lot of home owners with mortgages.
"Three years ago, the median borrower had a buffer equivalent to one year's interest and mortgage repayments, today the median borrower has a buffer of more than two years' mortgage payments," he noted.
"That will stand them in good stead for the day when interest rates do go up."
But for the tens of thousands of mainly recent borrowers who have a much smaller, or no, buffer on their mortgage, the acid test will come when the RBA hits go on its first rate rise.
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In a note out on the same day as Dr Lowe's testimony, Westpac's economists warn that home owners should also expect their property value to fall after those first rate rises start arriving, by 7 per cent in 2023 and a further 5 per cent in 2024.
Dr Lowe said rate rises would only happen when the economy was strong, unemployment was low and wages were growing solidly, meaning most borrowers should have higher incomes to cover their rising mortgage outlays.
The other hope will be that the bank regulator, APRA, and the institutions it regulates have been factoring in sufficient buffers to ensure borrowers can cope with the eventual rise in mortgage costs.
As Dr Lowe concluded: "We'll learn as we go along this journey."
Just, hopefully, not the hard way.