If anyone could provide a definitive answer on whether inflation has peaked, we'd have a much clearer view of how ASX shares might perform in 2023.
But of course, there's a divergence of views. This follows the release of the first monthly inflation report from the Australian Bureau of Statistics (ABS) yesterday. (Previously it only did quarterly reports.)
The report shows annual inflation tracking at 6.9% for the 12 months to the end of October. That's the highest level of inflation in two decades, but it's also lower than the September quarter figure of 7.3%.
That's why people are talking about whether inflation has peaked today.
The Reserve Bank of Australia (RBA) has had a longstanding inflation rate comfort zone of 2% to 3%. It has raised interest rates aggressively this year — by 2.75% — to try and quell the upwards spiral.
If it raises rates again next week by another 0.25%, it will be the highest annual increase since the introduction of cash rate targeting more than three decades ago.
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What has inflation done to ASX 200 shares in 2022?
Inflation has been a killer for ASX shares and United States equities in 2022.
The biggest impact occurred in the first half of the year. The S&P/ASX 200 Index (ASX: XJO) lost 15% in value between the first trading day of 2022 and the mid-June bottom. The S&P 500 in the US lost 21%.
Inflation has delivered two big blows to ASX shares and global equities.
Firstly, it's raised the costs of doing business for pretty much every company, thus impacting earnings.
Some companies have resilience in this climate. They are typically 'price makers', like supermarkets, which can offset rising costs by raising prices because customers will still buy their essential goods.
Some companies have unique resilience, like toll operator Transurban Group (ASX: TCL). Most of its toll charges are linked to inflation so they can raise prices by the same amount as inflation.
The second major blow from rapidly rising inflation is rapidly rising interest rates. This means companies have to pay more for their debt and customers tighten their purse strings. None of that is good for business.
Is inflation there yet?
Given all that, it's understandable that we investors would love to know when inflation is going to peak. Like a grumpy, sooky kid in the back seat of a car, we're all screaming, 'Are we there, yet'?
Well, after yesterday's new inflation numbers, many experts have weighed in on the issue.
Let's canvas their views.
What does the RBA think?
Reserve Bank Governor Philip Lowe delivered the board's latest inflation predictions in his monetary policy decision on 1 November.
Lowe said:
A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8 per cent later this year.
Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.
The Bank's central forecast is for CPI inflation to be around 4¾ per cent over 2023 and a little above 3 per cent over 2024.
We'll get a fresh analysis from the RBA after next week's cash rate decision on Tuesday.
What do the economic analysts think?
The first thing to point out is some experts don't think the new ABS monthly data is that reliable.
The Reserve Bank says monthly data has previously been a good indicator of market turns. Though, AMP Capital senior economist Diana Mousina isn't convinced.
According to reporting in The Australian, Mousina says the new monthly data is "probably underestimating inflation in October":
The monthly October release measures 63 per cent of the CPI basket with excluded areas including restaurant meals and takeaway foods, new dwelling purchase costs for apartments and electricity and gas prices.
The big lift in prices for electricity and gas recently in Australia means that the monthly CPI index is probably underestimating inflation in October.
The 'basket' Mousina is referring to is there is the basket of goods used to calculate inflation movements.
Putting that issue aside, let's see how these economic analysts have interpreted the numbers.
HSBC Australia chief economist, Paul Bloxham reckons inflation is "clearly still too high" but has "passed its peak".
Bloxham said:
We expect the RBA to hike by 25bp to 3.10 per cent in December, but [the] data supports our view that the RBA may choose to pause not long after that.
NAB experts predict inflation will peak in Q4 2022. But they expect the RBA to up rates by 0.25% in December, February, and March (there is no meeting in January).
CBA experts have the same timeline prediction for an inflation peak — Q4 2022. But CBA economist, Stephen Wu, reckons the uncertain outlook for energy prices could change that timeline.
ANZ economists Catherine Birch and Felicity Emmett reckon quarterly inflation will "accelerate in Q4". This would be due to flooding events and other factors.
They said in a note to clients:
… we'll be keeping an eye on the data to see whether cost pass-through is easing more quickly than we have factored or if the easing in global supply chain issues is showing up in the Australian data a bit earlier than we had assumed.
Citi Australia chief economist, Josh Williamson thinks the risk of higher inflation and wages remains.
He predicts a terminal cash rate of 3.35%. He thinks the RBA will start cutting rates by 2Q FY24 due to slowing economic growth and rising unemployment.
According to reporting in the Australian Financial Review (AFR), Russel Chesler, head of investments and capital markets at VanEck, reckons inflation will peak at 8% in Q4 2022.
He expects the RBA to raise rates a few more times in 2023 because it will take time for migrants to fill labour gaps.
Chesler added:
Coming out of the pandemic, Australian households are cashed-up, and although retail sales fell by 0.2% in October they are still up 12.5% for the last year.
Higher mortgage repayments have not deterred shoppers yet. That is helping to buoy economic activity and to fuel inflation…
Goldman Sachs is tipping a much higher terminal cash rate of 4.1% by May 2023, according to the AFR.
Goldman Sachs chief economist Andrew Boak said:
The 2023 challenge for Australia is to return inflation to an acceptable level without breaking the housing market and precipitating a recession.
