S&P/ASX 200 Index (ASX: XJO) investors hoping for an end to the successive string of interest rate rises from the Reserve Bank of Australia (RBA) may be left wanting.
Hopes of a pause or even an end to the central bank's rate hikes were stirred last month amid a somewhat softer May labour force report.
But the latest inflation data from the Australian Bureau of Statistics (ABS) released yesterday looks to have upended those hopes.
What's going on with Aussie inflation and the ASX 200?
Yesterday, ASX 200 investors sent the index down sharply after the ABS reported that the monthly Consumer Price Index (CPI) indicator increased by 6.8% in the year to April. That was well above consensus forecasts of 6.4%.
While annual inflation has fallen from the highs of 8.4% posted in December, the latest print was up from 6.3% a month earlier.
This is far higher than the RBA's target range of 2% to 3%. And with wages growth picking up pace with no matching increase in productivity, the RBA is worried inflation could become entrenched.
Meaning ASX 200 investors could likely expect not just one, but perhaps two more interest rate hikes in the months ahead.
Speaking in the capital, RBA governor Philip Lowe said (courtesy of The Australian Financial Review):
Wages growth at the moment is roughly 3.75%. Historically, that hasn't been a problem. The problem is with productivity growth. Over the last three years, there has been no increase in the average output produced per hour worked in Australia.
Historically annual productivity growth in Australia has been around 1%.
"Given what we're seeing internationally, I think the risks on inflation are more to the upside, and we need to be attentive to that," Lowe added.
What are the experts forecasting?
Judging by the response from most every analyst and economist to yesterday's hot-running inflation print, ASX 200 investors would do well to be prepared for another rate hike.
In fact, money markets have now fully priced in expectations of a rate increase by August.
As for the June interest rate decision due out from the RBA next Tuesday, Capital Economics Marcel Thieliant said (quoted by the AFR):
With inflation set to overshoot the RBA's forecasts this quarter, the bank will continue to increase interest rates, perhaps as soon as next week.
Thieliant expects the RBA to boost rates in June and July, bringing the official cash rate to 4.35%. That would put particular pressure on ASX 200 shares with large debt levels, or those priced with future earnings in mind.
Goldman Sachs chief economist Andrew Boak shares Thieliant's hawkish outlook.
According to Boak:
While part of the upside surprise in headline inflation reflected a strong rebound in volatile holiday travel prices, we view the composition as strong overall given an acceleration in inflation momentum across rents, new housing and several durable goods items.
Goldman Sachs now also expects the RBA to hike rates in June and July, with a cash rate of 4.35% greeting investors as of 4 July.
As for your editor?
Here's what I wrote yesterday, "The latest inflation data suggests to me that ASX 200 investors should prepare for at least one more interest rate increase in 2023."
Stay tuned!
