Tim Hext: Inflation remains low… for now
What’s next for inflation? Pendal portfolio manager Tim Hext explains in his weekly Bond, Income and Defensive Strategies report.
INFLATION has been this year’s hot topic — but it failed to show up in this week’s Q1 2021 CPI data in Australia.
Underlying inflation was a very tepid 0.3% for the quarter. Headline did better with higher fuel prices at 0.6%.
Inflation generally only really picks up 18 months after a recession ends. This means early 2022.
For now tradable (goods) inflation is coming through, at +1.1% for the quarter. Supply chain shortages globally are impacting. But services are stuck down at 0.4% quarterly, almost the lowest we’ve ever seen.
Housing held down services inflation this quarter. HomeBuilder subsidies have hidden an underlying 2% rise in actual building costs. Meanwhile rents — which recent data had suggested were rising — remained flat.
These should start to pick up in the year ahead as government schemes wind down.
Next month’s budget will be one to watch. If borders were to open next year the housing shortage that was building before the crisis will once again be exposed.
While the RBA may eventually want inflation to reach 2.5% they will have breathed a sigh of relief that it’s low for now.
Next week’s Statement of Monetary Policy will need significant “mark to markets” on the RBA’s pessimistic GDP and employment forecasts. But their inflation forecasts will only need modest upward adjustments.
Importantly, they can hold out till 2024 before inflation reaches target, enabling them to maintain the view that cash rates will stay here till then.
Markets kept modest rate hikes factored in for 2024 and beyond, but took out some of the pricing for hikes before then.
Three months is a long time between inflation prints in Australia so we will look to the US for signs in the next few months.
Stimulus cheques have hit accounts so we will watch the next few prints very closely. The starting point there is higher, so inflation should appear there first.
For now we maintain the view that anything 2% or lower for hedging inflation is excellent medium-term value. It provides insurance against a significant outbreak and realised levels should pay for themselves.
Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies (BIDS) team.
Led by Vimal Gor, Pendal’s BIDS 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.
The team oversees $22 billion invested across income, composite, pure alpha, global and Australian government strategies with the goal of building Australia’s most defensive line of funds.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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