Some useful thinking points on inflation.

Currently, inflation is running at c6% in the US, per annum. That’s a lot.

It is also quite high in other parts of the world, suggesting that high inflation in the US is not necessarily entirely to do with US fiscal or monetary conditions.

The basics: there is a high demand for goods, since services can’t easily (reliably) be provided or consumed. This means higher prices, given that goods supply cannot readily absorb such large sectoral reallocations.

So what, other than tighter monetary policy, can be done to help ease the bottlenecks?

What to do

Well, get everyone vaccinated, for a start. If people are safe, they can safely go back to doing things other than buying goods, which should help with pricing pressure.

That would also help get a lot of parents back into the workforce, as kids (who have been taken out of day-care) can go back safely.

In other words, it would get the supply of labour back to pre pandemic levels.

Immigration is another, both from state to state as well as country to country.

Closed borders means less influx of workers, for countries dependant on skilled migration. Australia is feeling this quite keenly (WA FIFO workers), as is the UK (nurses from Eastern Europe).

Removal of tariffs is yet another. The US placed sizeable tariffs on aluminium and steel, from China, and China placed considerable tariffs on Australian commodities (coal, wine).

The tariffs simply raise prices for consumers, and were born of political ill-will. Reciprocal tariff removal would help.


Why mention any of this?

Well, one, we find clients occasionally ask. “How will they get inflation down, unless it is using higher interest rates?” Usually, the end client is thinking of markedly higher rates that crush risky assets, and has an underlying desire to (often dramatically) de-risk the equity allocation.

So, it helps to understand the drivers of what is and isn’t likely.

The tariffs part is a key focus for us in terms of predicting commodity prices. Removal would mean lower steel prices, and hence likely lower returns from steel producing stocks.

So there is a stock and sector / asset class consideration as well.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Receive our investment insights

Something went wrong. Please check your entries and try again.