Australia’s latest quarterly inflation number is in. The number was a huge 6.1%. But, strangely, collectively S&P/ASX 200 Index (ASX: XJO) shares went up. What’s going on?
Inflation measures the change in prices of a group of different items and services. Ideally, the Reserve Bank of Australia (RBA) wants the annual inflation change to be between 2% to 3%, so we’re currently wildly overshooting that. Prices have jumped for things like petrol, lettuces and energy, which you’ve probably noticed.
This inflation number was for the three months to June 2022.
Inflation matters for interest rates
As mentioned, the RBA has a target range for inflation. Stronger inflation can have painful impacts on the economy, which is why the RBA wants to bring it under control.
The RBA key measure to reduce demand in the economy is increasing interest rates.
Interest rates have an extremely important impact on shares, property, bonds and so on. If interest rates are higher, this pulls down on underlying values – the opposite is true when interest rates fall.
So, with inflation so strong, investors are predicting a lot of interest rate hikes, which has hurt the value of ASX 200 shares (because current valuations take into account what’s expected to happen in the future).
Why did ASX 200 shares rise?
The ASX 200 index is up 0.6% since the release of the 6.1% inflation number even though it was the biggest rise in decades.
The explanation is probably because economists had been expecting the quarterly inflation number to be 6.3%.
When things aren’t quite as bad as expected, then it could mean interest rates don’t have to go as high to bring things under control. That could mean less damage to the ‘Aussie consumer’, smaller bad debts for the big four ASX banks and less hurt for valuations in general.
But, keep in mind this rise is just a slight improvement on yesterday. It’s still down around 10% in 2022.
While I wouldn’t specifically invest because of a quarterly inflation change, I do think the lower share prices are opportunities for the right investment. I’m on the hunt for both ASX dividend shares and ASX growth shares.
