Hot off the press!

https://www.afr.com/policy/economy/headline-inflation-surges-to-5-1pc-20220427-p5agdm

Headline inflation surged to 5.1 per cent in the first three months of the year, the highest annual level in more than 20 years, driven by record high petrol prices over the quarter and rising costs for home building.

Worried about what will actually happen to your portfolio when inflation hits? This could mean small caps are being oversold fearing the worst.

Billionaire investor Leon Cooperman called inflation a friend of common stocks - An interesting article from Business Insider Australia.

I tend to agree!

Some extracts from the article:

“Inflation reduces your buying power, which means you lose value holding cash. It’s also very detrimental to fixed-income securities,” said Anthony Denier, CEO of trading platform Webull.

“But, historically, stocks have been considered a hedge against inflation. This is because even as companies experience rising costs in the materials or resources to make their products or services, they have the ability to raise their own prices.”

“He gave the example of small-cap stocks, oil stocks, and emerging market stocks as examples of outperformers in this kind of environment.”

“Small-caps, or companies with a market value below $2 billion, typically do well in inflationary times because they serve niche markets, giving them more power to raise prices, Denier said.”

Happy compounding!

Cheers,

Rick

Hi Straws love the discussion with inflation and very relevant on what is playing out currently on markets.

Inflation is exactly what the reserve banks across the globe have been seeking to achieve over the past 24months as fears of deflation presented themselves when the pandemic landed.

To have it filter through in more permanent basis is good for markets when one is looking out however the challenge we are presented with is how aggressive will rates need to rise to bring it in check to a level that is healthy.

Working in logistics and relying on international imports of OEM auto parts out of Europe and to a lessor degree Asia it has been a tough 2021.

Capacity issues at the wharf's (due to demand being high), delays in getting goods it has meant our business has had to drive up inventory volumes as a further safe guard. This is simply further adding to the issues thus driving costs to import a 40ft container up by 150%.

This is also seeing a squeeze on profit margins .

This environment entering 2022 is much the same and with current orders being placed having a lead time of 12-16 weeks it is unlikely this mix will resolve itself until second half of 2022 at the earliest.

I think it is likely to play out for the full year with the rates increase to be the trigger to curb the demand (in theory) .

High high well that's the question unanswered and in a country whereby we highly geared to property we are in a interesting period over the coming 1-3yrs.

Once data emerges and rates are lifted my expectations is markets will do what they do and return to more normal patterns recognising great companies with growing revenue , margins and earnings ....

2022 is shaping as the time to accumulate these businesses with the eye on the landscape 2-5yrs min...

There were a couple of forum threads that touched on inflation and implications but I wondered if anyone else might be interested in capturing up-to-date experiences as a couple of price increases have belted me between the eyes in the last few weeks:

• Just received my car and home and contents insurance renewals - car premium up 19% and home and contents up 17% - both with AAMI - 20-year customer, no claims etc. After a call they were prepared to drop by a couple of % points but I'm now shopping around.
• The regular (Bega) cheese we buy at Woolies - up 11%
• The business shirts I usually buy up 17%
• A couple of online subscriptions up by 8 and 10%
• My SMSF admin fees 5%

Of course, this is exactly why the ABS uses its "basket" approach and doesn't rely on my anecdotal experience. And I can point to things deflating, of course, books, comms... but it does feel like there's an inflationary shift happening.

This from the RBA... (https://www.rba.gov.au/education/resources/explainers/inflation-and-its-measurement.html)... there is a full explainer pdf available at this link as well.

How is Inflation Measured?

Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over time, but prices can also fall (a situation called deflation).

The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households.

In Australia, the CPI is calculated by the Australian Bureau of Statistics (ABS) and published once a quarter. To calculate the CPI, the ABS collects prices for thousands of items, which are grouped into 87 categories (or expenditure classes) and 11 groups. Every quarter, the ABS calculates the price changes of each item from the previous quarter and aggregates them to work out the inflation rate for the entire CPI basket.

ABS inflation data is available at https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation