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Tim Hext: Higher inflation isn’t guaranteed, but insurance remains cheap

COST OF LIVING pressures are creeping in, with more to come.

I’ve lost track of how many politicians have promised to “ease the squeeze”, but with an election early next year it’s probably getting dusted off.

So far the official data is not fully reflecting this, although food and fuel prices should see another healthy headline inflation number for Q3 when released in late October.

All this has happened with subdued demand.

As mentioned many times over the past 18 months this has been — and remains for now — supply led.

However talk of transitory is misleading — unless three years is now considered transitory.

When NSW reopens shortly, high savings and incomes should see a surge in demand, pushing prices higher again.

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Pendal’s Income and Fixed Interest funds

Supply will be slower to come back, partly mandated (eg restaurant dining numbers) and partly due to businesses having closed.

Good luck finding a restaurant booking in December. I would imagine proprietors take advantage of this with pricing. Who would blame them after the last 18 months ?

After a subdued September, due to a rare fall in risk assets, market inflation expectations are returning this month, once again nudging 2%. We expect to see 2.5% by year end.

Wagse remains the missing piece for medium-term inflation.

Everyone is reporting worker shortages but so far companies are looking to short-term measures to attract and keep staff — a sign-on bonus here, flexible conditions there.

However the dam wall of ten years of low wage growth is at risk of bursting.

I know if I worked in affected industries — from healthcare to construction to hospitality — I’d be taking advantage of a sellers (workers) market for labour. A recent increase in strike action suggests this realisation is dawning.

At risk of sounding like a broken record, higher inflation is not guaranteed, but insurance remains cheap.

About Tim Hext and Pendal’s Income and Fixed Interest boutique

Tim Hext is a portfolio manager with Pendal’s Income and Fixed Interest team (formerly Bond, Income and Defensive Strategies).

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. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.

With the goal of building the most defensive line of funds in Australia, the team oversees $A22 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at October 6, 2021.

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