Australian Investors Should Accept Higher Inflation As A Medium Term Prospect
Posted by Kris Sayce on Mar 19th, 2007
MELBOURNE AUSTRALIA (Daily Reckoning): Looking at the Friday to Friday performance of the All Ordinaries Index, one could be forgiven for thinking that not much had happened. All that there was to show for the week’s action was a tiny seven point gain.
Between that though, the All Ords had put on a 1% gain first thing on Monday before falling by over 2% on Wednesday, only to see a similar sized gain on Thursday.
Even before the market opened on Thursday morning one could tell that it wasn’t going to be a half-hearted rally. Investors were in, boots and all. Admittedly, much of the false jockeying for position faded as the open neared, but stocks such as BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) still opened at a healthy premium to the previous day’s close.
Before the market opened it looked as though BHP could open at a 10% premium, and Rio at a 7% increase. By the time it all kicked off those overly bullish numbers were reduced somewhat to a 2% and 1% gain respectively with both stocks holding on to these positions throughout the day without gaining much more.
By the end of the day the whole market had picked up many of the pieces from the previous day’s sell-off, with the All Ordinaries gaining by 1.8% and then closing out Friday with a slight fall to take the week’s gain to just 0.1%.
As we intimated last week, much of the action was following market activity in the United States and the whole subprime mortgage debacle. By the end of the week the market had once again turned towards the outlook for the supply, demand and price of commodities.
Added into the mix was the interpretation of comments from Reserve Bank of Australia Assistant Governor Malcolm Edey. He told the Australia-Japan Economic Outlook conference in Sydney on Friday that Australian inflation is “more likely to be too high than too low.”
The surprise is not so much that the RBA have indicated the potential for higher rates of inflation. The surprise is that it takes the RBA to indicate the potential for higher rates of inflation. The other surprise is the apparent unwillingness of investors to recognise higher inflation as a medium term prospect.
The Assistant Governor told the conference that inflation is “still higher than ideal. It implies that inflation is more likely to be too high than too low in the period we can foresee.”
He went on to say, “some of the factors pushing up underlying inflation last year remain in place,” clearly referring to high commodity prices, rising demand and an increase in wages. He continued, “the bank will be giving careful consideration to these developments, along with other incoming data, as it continues to review inflation prospects month by month.”
Not forgetting that the last quarterly inflation figure had inflation running above the top end of its 2-3% target band. Whether the RBA likes it or not, commodity prices are still running at high levels, higher than where they were three years ago despite having fallen from the elevated levels of the middle of last year.
As we have mentioned countless times before, it is reasonable to expect that there will be a lag as rising commodity prices filter through the system. Crude oil remains tied around the USD$60 a barrel mark. Try hedging that exposure for the same price as four years ago, namely USD$30. It can’t be done.
Other commodity prices such as copper and nickel have had similar, if not more impressive, appreciations in price.
Edey commented further by saying, “The economy has moved closer to full capacity, with recent indicators pointing to stronger conditions in the second half of the year.” It looks like there is only one direction for inflation.
Kris Sayce
for The Daily Reckoning Australia
An aneamic response to the inflation monster asserting itself in the UK. They should have raised .5The UK have raised interest rates from 5.25% to 5.5% MLR (Minimum Lending Rate). These have been raised to curb inflation ( they have three rates of inflation as some things are included or excluded, the main rate is 3.1% and another that includes house mortgages is 4.8% ).
UK house prices rose 1.1% in April to an annual 10.9%. Central London prices rose 3.5% in April.
An aneamic response to the inflation monster asserting itself in the UK. They should have raised .5
Re House prices- The figures are skewed by London, which is on fire with Russian (Mafia?) money poring in. The rest of UK is mostly flat to down. FWIW
Yeah NI is berserk.... absolutely Ape doo-doo.Hi, Except for Northern Ireland where house prices have risen 56% in the last 12 months and 62% in Belfast.
Quote:
Originally Posted by noirua
Hi, Except for Northern Ireland where house prices have risen 56% in the last 12 months and 62% in Belfast.
Yeah NI is berserk.... absolutely Ape doo-doo.
Just out of curiosity, which other countries are on the list?
Hmmm, does not sound as though the Norges CB thinks inflation is transitionary.Norway's central bank raised its benchmark interest rate on Thursday and said it expects to hike again in December, as it joins a short but growing list of nations moving away from emergency-level borrowing costs.
Norges Bank's monetary policy committee raised the sight deposit rate to 0.25% from a record low of zero,
Oeystein Olsen told a news conference. "It's time to start a gradual normalisation of the policy rate."
The monetary policy committee said its forecast for four more hikes by the end of 2022, to a rate of 1.25%, had become even more likely.
My bold.Fresh from being one of the very first countries to stop all covid restrictions, Norway , courtesy of its central bank, has become the first of the G10 nations to increase its base interest rates since the beginning of the Covid pandemic.
From Au News
Hmmm, does not sound as though the Norges CB thinks inflation is transitionary.
Mick
“Transitory” inflation could mean one of three scenarios:
- Prices rise and plunge
- Prices rise and stay where they are
- Prices rise and continue to rise, but more slowly
I doubt Norway is bankrupt so they can afford a strong currency, pay back debt and sell petrol that every one wants and needs but does not want to be seen or invested nearMy bold.
So according to the real estate focused GlobeSt.com, transitory inflation has three meanings/assumptions as per:
Not knowing the Norwegian economic psyche, my guess is that their CB is hedging a 3 way bet with the third scenario backed for the win. Haha, but what would I know?
I'm just a mug punter, lol.
| Canada’s main stock index moved higher as bullion prices slipped on Thursday in a mild trading day ahead of a public holiday, as investors digest a batch of economic data. The Canadian dollar consolidated earlier gains following the Bank of Canada’s monetary policy meeting when it raised the overnight rate by 0.50% to 1.0%. Financials, industrials, and energy moved higher. |
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