THIS WEEK’S inflation numbers were extremely strong.
Headline at 1.3% on a quarterly basis and 3.5% annual. Underlying inflation at 1% or 2.6% annual.
Unusually there were almost no negative contributions.
New dwellings, food and fuel were the main drivers but the real surprise came from a wider range of goods which normally see little if any inflation.
Clothing, footwear, furnishings and a wide range of everyday items are going up by around 3 to 5% annually.
Some of that of course is supply related and might come down if things normalise later in the year. But for now that is all speculation.
The RBA once again has been railroaded on its forecasts and will need to address this number in next week’s meeting.
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The only thing they can still hang their dovish hat on is wages — but given labour shortages that may move quicker in the year ahead.
Markets actually took the numbers in their stride.
That’s likely because most knew a higher number was a good chance — but also against the current backdrop of risk-off in equities and credit.
Four rate hikes are priced for 2022 with the first in May.
The RBA would have thought that too aggressive, but now may be forced to admit the market has been better at reading the economy.
Although this week’s numbers give support to concerns around inflation, we still don’t expect an unhinging of inflation from the medium term 2% to 3% band.
For investment markets that would not be a bad result.
After all, 2% to 3% is still considered low — and business investment and the economy in general can easily handle that.
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
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