The Australian share market was flat in October, with the All-Ordinaries index closing the month 0.1% higher at 7,639.1 points. The Australian Dollar rallied by 4.0% in the month, with one Australian Dollar currently buying 75.15 US cents.
The Reserve Bank of Australia (RBA) held the official Cash Rate at 0.1% per annum in October (unchanged since August last year), with the RBA board due to meet tomorrow. While no change in the Cash Rate is expected in tomorrow’s meeting, markets will be looking for any guidance as to when the RBA’s current rate stance is likely to change.
Global share market results were positive in October. The United States Dow Jones index gained by 5.8% (recovering from its September losses), the London FTSE gained by 2.1%, the Japan Nikkei 225 gained by 0.1% and the Hong Kong Hang Seng Index gained by 3.3% for the month.
During September, the RBA’s preferred core inflation measure jumped a bigger than expected 0.7% in the quarter, lifting the annual inflation rate to 2.1%. This is the first time that the annual inflation rate has been within the RBA’s target band 2.0% to 3.0% in six years.
The chart below shows the historical inflation rate as measured by the Consumer Price Index (CPI).
High levels of construction activity, shortages of building materials and supply disruptions underpinned the biggest price jump for new built homes since 2000 when the GST was introduced. Global supply constraints also resulted in price rises for many tradeable goods including furniture (up 3.8%), motor vehicles (up 1.4%) and audio-visual equipment (up 1.8%).
Given the result, the bond market is now tipping that the RBA will increase the Cash Rate well before Governor Philip Lowe’s 2024 guidance, with many economists forecasting the RBA to start increasing the Cash Rate by late next year.
The inflation results also caused the Australian Dollar to increase to within a three-month high.
Higher than expected inflation appears to be somewhat of a global phenomenon. In this regard, the Reserve Bank of New Zealand lifted interest rates by 0.25% per annum, making it one of the first developed economies to reverse rate cuts put in place during the COVID-19 pandemic.
Nevertheless, global debate remains over whether price increases related to COVID-19 supply chain disruption are temporary, or if they are becoming embedded in higher continuing inflation.
The Australian economy has been exceptionally good at growing at a reasonable pace without generating excessive wage costs. If wage costs start to rise rapidly, it would appear as though the recent spike in inflation is certainly not temporary.
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.