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Tim Hext: Inflation remains stubbornly high — but not as high as you may think

Despite higher-than-expected monthly data, the outlook for inflation should be mildly friendly over the next few months, says Pendal’s TIM HEXT

IF forecasting inflation was already complicated, the move to monthly numbers last year added further complexity.

The latest monthly Consumer Price Index from the Bureau of Statistics — which compares prices in April 2023 and April 2022 — shows an annual rise of 6.8%, versus an expected 6.4%.

On the surface this should worry the Reserve Bank and markets — and increase the chance of another rate hike in June.

But under the hood, the May number looks like it will be closer to 5.5%, which means the RBA should be able to hang on till August and reassess then.

How can we tell? This is where it gets a little complicated.

The monthly inflation numbers are published as year-on-year outcomes, and you must back-solve to gain a sense of the monthly pace.

In this case, monthly was up 0.7% versus an expected 0.4%.

There is no underlying inflation data yet.

Also, for now only half of items are updated every month. (Another 10% are updated annually (council rates, health, education) and the remaining 40% are updated quarterly, spread across the three months).

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Pendal’s Income and Fixed Interest funds

This will change in the future. The Bureau has been given extra resources and funding to introduce an accurate monthly series, similar to other countries.

Impact of subsidies

The other detail inflation forecasters need to stay on top of is the impact of subsidies, which exploded in scope and breadth with Covid and energy shocks.

CPI measures the price a consumer pays, so a subsidy will reduce that.

But a rebate does not reduce the headline price, and is not counted.

These subsidies appear and disappear regularly now and must be kept track of.

The Morrison government’s HomeBuilder scheme was the big one in 2021 and 2022, but now it’s all about utility prices.

The subsidy detail for this April number — which the ABS reminded us of — is that in April 2022 the Morrison government cut fuel excise in half as prices surged post the Ukraine invasion.

This relief was removed in October. This means that — despite falls in the price of crude oil — the price we are paying at the pump is higher than this time last year.

Beyond fuel, there were modest upside surprises across clothing, furnishings, food and holiday travel.

These would be uncomfortable for the RBA, though not likely enough to warrant another rise in June.

However, with the market pricing in only a 35 per cent chance of a hike, these are not odds we will take on.

What it means for investors

The implication for bonds is muted.

As mentioned, the outlook for inflation here and in the US should be mildly friendly over the next few months.

Beyond that time will tell. Risk markets should come under some moderate pressure, though, as it’s a reminder of the long and hard road ahead.

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

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.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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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 at May 31, 2023. PFSL is the responsible entity and issuer of units in the Pendal Monthly Income Plus Fund (ARSN: 137 707 996) and Pendal Dynamic Income Fund (ARSN: 622 750 734) (Funds). A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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