Is inflation back in black? Here’s what it means for ASX shares

Apparently, inflation is back in black and back into positive territory Here’s what that means for the economy and for ASX shares.

Effect of inflation on asx shares represented by finger pointing to letter blocks spelling the word inflation

Image source: Getty Images

Inflation is not a problem we hear too much about in 2020 – apart from a lack of it. In fact, most of the discussions surrounding inflation have instead been about deflation, or negative inflation.

Inflation, if you didn’t know, refers to the (usually) gradual loss of purchasing power of a currency over time. It’s the reason your grandparents used to talk about a loaf of bread costing 25 cents, or a brand new car costing $5,000. Most economists accept that a small level of inflation is good for the economy. It encourages people to spend their money sooner rather than later. It also encourages credit (borrowing money) since a loan loses its ‘real’ value over time with inflation.

Inflation used to be an ever-present threat to economic growth that governments and central banks watched like a hawk (and raised interest rates if it got too high). Under conventional economic theory, inflation is usually pushed higher in times of strong economic growth, and falls off the perch in times of sluggish growth or recession. But over the past 10 years or so, economists have stopped talking about inflation and started to talk about the lack of it. This has only been exacerbated as a result of the coronavirus pandemic. Since the pandemic began, the entire world has been plunged into recession. Inflation in Australia actually went negative (i.e. deflation) for the first time since 1998 in 2020.

Inflation is back in black

But according to reporting in the Australian Financial Review (AFR) this week, inflation is back in black and let loose from the noose.

According to the AFR, Australia recorded the biggest quarterly rise in inflation since 2006 in the quarter ending 30 September, increasing 1.6%. That pushes the annual headline inflation rate to 0.7%, up from the -0.3% that was running in the previous quarter.

The fall that inflation took in the quarter ending 30 June was apparently the biggest quarterly fall since the Australian Bureau of Statistics began recording inflation way back in 1948.

What do higher prices mean for ASX shares?

Whilst this news looks good for the economy, there are a couple of caveats to mention. Firstly, as the AFR notes, childcare costs were a significant component of the positive quarterly inflation number at 0.9%. Childcare was temporarily made universally free by the federal government earlier in the year. However, this policy expired on 13 July. Further, the oil price spent the quarter recovering from historic lows (including a short period of negative oil prices). This would have fed into petrol and transportation price rises over the quarter as well.

Even so, all things considered, an inflation rate of 1.6% for the quarter is good news. It indicates that the Australian economy is in recovery mode (even if it is mild at this stage). And that, in turn, is good news for the ASX shares that operate within it.

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