Inflation genie uncorks: CPI records largest rise since July 2000

Consumer prices in Australia climbed at their highest rates since 2001, rising 5.1% annually by the end of the March quarter. 

Head of Prices Statistics at the ABS, Michelle Marquardt, said "The CPI recorded its largest quarterly and annual rises since the introduction of the goods and services tax (GST)."

Breaking down inflation

The most significant contributors to March quarter inflation was:

• Automotive fuel +11%

• Tertiary education +6.3%

• New dwellings +5.7%

Another notable riser was across the food group, which rose 2.8% as higher transport, fertiliser, packaging and ingredient costs pushed all food and non-food grocery products higher.

Source: Australian Bureau of Statistics

Food for thought

RBA needs to hike

The RBA has every reason to start raising interest rates after insisting that it wanted to see "actual evidence that inflation is sustainably within the 2-3% target range".

In the March quarter, core inflation - which the RBA prefers to focus on - increased to a 13-year high of 3.5%. The reading excludes volatile items like food and energy.

May is now the call for the RBA's first rate hike in more than 11 years.

At this point in time, an RBA rate hike is rather inconsequential as the Fed, US earnings season and China's covid outbreak are the main headlines moving the markets.

In the medium term, the market is pricing in a cash rate of around 3.0% by this time next year. This implies that:

• The RBA needs to get really aggressive with rate hikes

• Variable mortgage rates could be >5%

  • What does this mean for Australia's mortgage market?

  • Does this result in net interest margin expansion for banks?

Source: Australian Securities Exchange

Tech out, value in

We all know what higher interest rates can do to technology stocks.

Inflation has proven to be immensely sticky, forcing central banks to become even more hawkish with every passing month.

Could this flag further pain ahead for beaten up tech stocks?

ASX 200 vs. ASX 200 Tech Index (Orange), ASX 200 Staples Index (Yellow), ASX 200 Utilities Index (Purple)

Demand destruction

High inflation is tolerable until the consumer caves in.

So far, the pandemic has meant that households have built substantial buffers in savings, which can help absorb the broad-based price increases.

As of last Friday, 99 companies in the S&P 500 had reported first quarter earnings, with 77.8% of them beating market expectations. This means that corporate earnings are holding up relatively well in the face of cost inflation, covid and supply chain disruptions.

But at what point will consumer spending begin to stall, leading to weaker-than-expected corporate earnings?