Australia’s annual inflation rate has taken an unexpected step up, increasing pressure on the Reserve Bank to push interest rates higher and once again raising the prospect that Australia will fall into recession sometime over the next few months.

The annual inflation rate for the year to August reached 5.2 per cent, up from 4.9 per cent recorded for the year to July, spurred by higher prices for petrol, financial services, and labour costs, following the 5.75 per cent wage rise for 2.4 million Australian workers in July.

Some analysts believe recent wage increases and the Federal Government’s drive to reduce unemployment levels below their current historic low levels and provide more union friendly workplace regulations, will combine to push wages even higher.

The prospect of further wage hikes, low productive improvements combined with continued high levels of inflation, threatens to return the Australian economy to the dismal economic days of the seventies and with it, stagflation.

Of all the domestic price hikes, higher petrol prices are seen as the most troubling as they have such significant flow through effects, making everything in the country more expensive to produce and so lifting the cost of living for all Australians.

Globally, US Treasury 10-year bond yields rose to above 4.5 per cent during the past month, taking them to their highest level since the global crisis started in 2007, as fears mount that climbing inflation will persist for years to come.

This, and the generally accepted downturn in growth in the massive Chinese economy, is prompting fears overseas that the US economy will certainly fall into recession next year, with developed countries around the world to follow.

While there was hope the Reserve Bank was succeeding in driving down inflation, this latest uptick in prices and overseas interest rates will put the Reserve Bank under renewed pressure to lift domestic rates yet again.

Although the much talked about fixed-rate mortgage cliff seems to have been averted, where homeowners have faced the end of super low fixed rate loans and been forced to move to higher variable rate loans, pressure is emerging in the housing market.

According to figures from the research house, Core Logic, the number of homes that have been sold at a nominal loss, and which have only been owned for two years or less, has increased from just 2.7% to 9.7% during the June quarter.

There also seems to be a trend where people who moved to regional areas during the pandemic are starting to sell up and drift back to the cities. Resales within two years of purchase, made up 11.1% of all regional resales, compared to a decade average of 7.2% per year.

A rare bright spot for investors remains the hefty returns to shareholders with Australia’s largest listed companies paying out some $21.7 billion during the last week in September, by way of improved dividend payments.

BHP paid out $6.34 billion to their shareholders via a $1.25 per share dividend, Fortesque Metal paid out $3 billion via a $1 a share dividend and after posting a record-breaking profit, the Commonwealth Bank of Australia paid out $4 billion by way of a $2.40 a share dividend.

The outlook and implications for investors
The next 12 months are likely to see a further easing in inflation pressure and central banks starting to relax their policy settings. This should make for reasonable share market returns, provided any recession is mild.

We remain “cautiously optimistic” and in light of the above risk factors, continue to suggest a diversified, long-term approach will produce results over time. Remember that pullbacks such as we have experienced recently serve as an opportunity for those still saving and accumulating, and we typically advocate a “bucketing” approach for retirees to allow patience with their growth assets.

Economic indicators – 30 Sep 2023	1 year % total return
Australian Shares	13.5
Global Shares (hedged)	18.0
Global Shares (unhedged)	20.3
Australian Property Securities	11.9
Australian Bonds	1.6
Global Bonds (hedged)	0.5
Cash	3.6

 

Published : 11 Oct 2023