Business News

Inflation and rate rises

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by Peter Switzer

Inflation grabbed the headlines here and in the US but in the Yanks' case the stock market went up big time overnight while in our case shares headed south yesterday. This is the story of two different economies where the Americans are in no danger of seeing an imminent interest rate rise while in our case it could be sooner than expected.

Maybe one thing could delay a rate rise, and that could be the exploding Oz dollar with some analysts seeing a target of 110 US cents for the currency!

Inflation spike

At home, the CPI rose by 1.6 per cent in the March quarter, which was well over economists’ expectations. They thought a 1.2 per cent rise was on the cards. This brought our annual rate of inflation up from 2.7 per cent to 3.3 per cent, which on first blush is worrying stuff as the RBA’s job is to keep inflation in a two to three per cent band.

The causes of the inflation spike were higher prices for fruit, vegetables, education, pharmaceuticals and petrol. There were also rises for alcohol, tobacco and financial services.

But these rises were partially reduced by lower prices for electrical and technology goods, clothing, footwear and recreation goods.

You can thank the rising dollar here as it contained our inflation’s rise. On the other hand, petrol’s rise is because of the troubles in Egypt, Libya and the Middle East. There was also a spot of trouble in Queensland with floods and cyclones, which have pushed the price of bananas to $12 a kilo.

March quarter exceptional

The March quarter has been an exceptional period and therefore this inflation figure was always going to be a worry but the headline number of 1.6 per cent is less important than the underlying figure of 0.9 per cent, which brought the annual inflation result down to 2.3 per cent. This is inside the RBA’s comfort zone.

The CommSec team says the inflation news will mean the RBA is on alert but not alarmed.

“However, it is important to point out that the robust inflation result was largely driven by one-off items like the higher food and vegetable prices due to the natural disasters, and seasonal rises in education fees as well as pharmaceuticals,” says Savanth Sebastian, economist at CommSec. “Added to which there is not much the Reserve Bank can do about the recent surge in oil prices and the flow on effect to domestic pump prices.”

Bill Evans, chief economist at Westpac, says the jump in the underlying inflation figure from 0.4 per cent to 0.9 per cent will worry the RBA. He expects one interest rate rise this year in the September quarter, which will give the RBA at least one more look at inflation before they move again.

Fed boss press conference

The spectre of higher interest rates and a stronger dollar did not help the stock market yesterday but the Bernanke news out of the States certainly inspired stock buying with the S&P 500 up around 0.6 per cent.

Now remember the Yanks had the Fed chairman doing his first ever press conference after the FOMC meeting which sets interest rate policy. News about QE2 and the timing for an interest rate rise were the main topics of interest.

So, how was the press conference received? Well, the Dow was up 40 points before Bernanke spoke and ended up 95 points at 12,690.

The Fed boss was more worried about getting the growth rate up than he was about an inflation threat, and while this worried inflation hawks, investors who want growth liked what they heard.

The upshot of the press conference was that the US dollar fell and precious metals rose, which means no significant change ahead, though the conclusion was that there would not be a QE3.

Correction on the cards

As investors, we still face the prospect of good reasons to buy stocks but given the big rises since late August with the S&P/ASX 200 up 12.7 per cent and the S&P 500 up 29.5 per cent, a correction in the US market is on the cards, especially with May looming.

Of course this is the concern for a short-term trader, while the long-term player should see it as a new buying opportunity.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Thursday, April 28, 2011

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