Inflation will return
About the author:
- Author name:
- By Ken Howard
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- Date posted:
- 10 May 2021, 9:00 AM
Very low interest rates (thank you savers) and hundreds of billions of dollars of taxpayer funded Government stimulus (thank you future taxpayers), has had the desired effect on the Australian economy.
Based on the ABS March Labour Force Survey:
- There are more Australian’s employed today than at any time pre-COVID-19.
- The labour force participation rate # is at pre-COVID-19 highs and
- The ‘under-employment’* rate is at 8-year lows (that is, underemployment is back to the levels last seen during the mining construction boom).
At the current rate of jobs growth, unemployment is likely to be below 5% in the coming weeks and this is despite some significant segments of the economy e.g. aviation & CBD cafés operating well below pre-COVID-19 levels.
Economic recovery
The economic recovery from the COVID-19 lockdown lows, of April / May last year, has exceeded even the most optimistic forecasts and the pattern is being repeated globally (wherever COVID-19 lockdown restrictions have been removed), but will it be enough to bring back inflation. There are encouraging signs:
- Global shortages in silicon chips and automobiles,
- Numerous retailers have gone on record, saying “they haven’t had to discount” and
- The commodity prices for iron ore, copper and aluminium, are returning to the mining boom highs.
I know it can be dangerous to extrapolate a couple months of encouraging data, but the early signs are there, we just need to see wages growth, for the supply disruption and price hikes, to translate into sustained inflation.
Inflation
A little bit of inflation is ‘good’, a lot of inflation is ‘bad’. Inflation erodes the cost of debt (and the rate of return on cash), and gradually transfers wealth from savers (cash) to investors and workers. To the extent that your savings are invested in, and your employment is directed towards, the production of the goods and services the economy needs, inflation will be a positive tailwind. To the extent your savings are sitting in cash and / or fixed interest securities, inflation will be a negative headwind.
Every strategy needs some cash for short-term liquidity and optionality. Every strategy needs some fixed interest, for medium-term liquidity and optionality, and every strategy needs productive assets (assets which produce the goods and services the economy needs) for sustainable, long-term returns.
Arguably, right now, the ‘share-market’ as-a-whole is trading around fair value. Sure, some stocks are expensive, while others are cheap, but most stocks are trading at a fair price given the range of possibilities for the future. In the current market I have been recommending that clients add to holdings in Amcor and Coles. Both businesses should be able to sustain and grow their current dividend, even if we have to revisit the COVID-19 restrictions of 2020.
# The participation rates measures the percentage of Australians, of working age, currently working or looking for work.
* Under-employment captures those who are working, but not working as many hours as they would like to be working.
More Information
Ken Howard is a Private Client Adviser at Morgans. Ken's passion is in supporting and educating clients so they can attain and sustain financial independence.
If you have any questions about your financial plan or your share portfolio, your strategy, investments or would just like to catch up, please do not hesitate to give me a call on 07 3334 4856.
General Advice warning: This article is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wish to act upon this report consult with their investment adviser before doing so. Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions.