How Putin’s war will affect your money

Even though the attack by Russia on Ukraine is half a world away, its financial effects will be felt in hip pockets here, with higher petrol prices, supermarket prices and mortgage repayments.

Australia’s annual headline inflation rate is running at about 3.5 per cent, but it is forecast to move higher on the back of surging oil prices and price hikes for other commodities.

The war in the Ukraine has roiled global share and commodity markets.Credit:Getty Images

Russia is a large commodity producer, especially of oil and gas. Together with Ukraine, it supplies 30 per cent of worldwide production.

The price of a barrel of oil has risen to more than 10 per cent to $US100 and the price of gas is up 20 per cent.

Prices for a number of agricultural commodities are also jumping, as Russia and Ukraine together account for about 20 per cent of global corn exports and 25 per cent of wheat exports.

Petrol prices soar

The price of petrol has continued to push past previous records.

The Australian Institute of Petroleum says the national average unleaded petrol price was 180.6 cents a litre last week. However, in many areas, prices are already nearing $2 a litre.

Commonwealth Bank commodity strategists expect Brent crude oil prices to continue to climb to an average of $US110 a barrel over the next six months, with a peak in prices potentially even higher.

“If the Aussie dollar held constant against the greenback, an average price of $US110 a barrel … would see domestic petrol prices average 195 cents a litre,” says Ryan Felsman, senior economist at CommSec.

This would add 0.5 percentage points to headline inflation. “We now, therefore, expect the growth in annual headline consumer price inflation to hit 4.4 per cent in the middle of 2022, he says.

Food prices on way up

Higher fuel prices, including diesel prices, will boost transportation costs, feeding into price increases for a wide range of goods and services across the economy, including food on supermarket shelves.

Higher wheat and corn prices will also probably flow through to the manufacturing costs of many food items.

Coles chief executive Steven Cain says the impact of inflation has already been evident in categories such as red meat and packaged goods, but pricing pressures were starting to expand to more and more items.

Mortgage rates to rise

Shane Oliver, chief economist at AMP Capital Investors, says upwards pressure on energy prices and wider commodity prices would reinforce the case for the Reserve Bank of Australia to start lifting official interest rates. He expects the central bank to start lifting the cash rate in August.

Analysis of big-four bank cash rate forecasts compiled by RateCity shows mortgage repayments could rise between $303 and $503 a month by the end 2023 for someone with a $500,000, 25-year owner-occupier, principal-and-interest home loan.

Higher mortgage rates would also reduce the borrowing capacity of home buyers and further dampen Sydney and Melbourne property prices.

Figures released by CoreLogic for February show Sydney prices fell 0.1 per cent – the first fall since September 2020 – while Melbourne prices were flat.

Shares dip, but some do better

Sharemarkets fell globally on the news of the invasion of Ukraine by Russia. The Australian benchmark S&P/ASX 200 Index lost about 3 per cent, with shares in retail, materials and financial companies hit the hardest.

The index has since recovered some of its losses, but the removal of many Russian banks from the SWIFT financial messaging system and Russian president Vladimir Putin’s statement that he has placed nuclear forces on alert caused sharemarkets to falter again.

Analysts expect sharemarket volatility to continue until the situation in Eastern Europe stabilises.

Gold surges, bitcoin slumps

Gold prices surge during times of geopolitical tensions, as the yellow metal is regarded as a safe-haven investment. That is happening this time around, which will benefit Australian-listed gold miners, such as Newcrest Mining, Evolution Mining and Northern Star, says Kyle Rodda, an analyst at IG Markets.

At the same time, the prices of bitcoin, ethereum and other cryptocurrencies have slumped.

Despite claims by their supporters that crypto is not correlated to traditional investment asset classes, when sharemarkets fall, cryptocurrencies generally do so, too.

Bitcoin is trading at about $US40,000 – down from a high of more than $US64,000 in November of last year.

“We’ve always been of the view that gold and bitcoin serve entirely different functions, and this is being borne out in markets,” says Jodi Stanton, chief executive of Rush Gold.

Retirement savings hit

Share prices have a big impact on retirement savings.

Most workers have their retirement savings invested in superannuation fund investment options that have about half of their money invested in Australian and overseas shares.

If global share prices were to dip 10 per cent, many super fund balances would fall by about half of that amount.

However, previous downturns, such as the COVID-19 induced sharemarket crash in early 2020, have shown that those who switched their super to their fund’s “cash” investment option missed out on the recovery when sharemarkets rebounded. They would have been better off staying calm and riding out the storm.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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