Why every ASX investor should be watching these inflation signals

ASX investors have been keeping a wary eye on inflation indicators. And for good reason. We look at the outlook for higher interest rates.

| More on:
A piggy bank attached a bicycle pump floats up, indicating rising inflation

Image Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX investors have been keeping a wary eye on inflation indicators.

And for good reason.

If inflation remains at or below the Reserve Bank of Australia's (RBA) target range of 2–3% on average, then investors can expect the official cash rate to remain at the current record low of 0.10% until 2024. Or perhaps longer.

Moreover, if inflation begins to run hot on the back of massive government spending and central bank quantitative easing (QE) programs intended to lift economies from their COVID slowdowns, then official interest rates may rise sooner.

Inflation expectations differ

Precisely when inflation and interest rates are expected to move higher depends on who you ask.

Central banks the world over are largely united in proclaiming that any sustained increase in inflation is unlikely before 2024.

The price increases we are seeing today and likely to see over the coming months, they say, are transitory. Essentially that means price rises are being driven by temporary bottlenecks in labour and materials caused by the pandemic just as demand begins to surge.

These bottlenecks can remain in place for months after economies start opening back up…temporarily driving up prices until they're cleared.

The Australian government's budget forecasts that the consumer price index (CPI) will come in around 2.25% by mid-2023. That figure is well within the RBA's target range.

The RBA has a similar view, writing, "Despite the stronger outlook for output and the labour market, inflation and wages growth are expected to remain low, picking up only gradually."

Industry commentary

Gareth Aird, head of Australian Economics at Commonwealth Bank of Australia (ASX: CBA) doesn't believe wages growth is going to be quite that gradual.

According to Aird (quoted by Bloomberg):

If you're trying to achieve higher wages and higher inflation, what you need is things like capacity utilisation at elevated levels, you need lots of skills shortages so that you've got a better chance of wages coming through. Everything looks like it's moving in the right direction on that front.

Aird said "the forward-looking indicators of labour demand are as strong as we've seen them in a long, long time". Hence, CBA's expectations for wags and inflation "is running ahead of what the RBA is saying".

Speaking of skills shortages in Australia, a labour crunch appears to be popping up. It is observable from the ski slopes to the beachfront coffee shops to the outback mines.

This excerpt from Bloomberg helps explain why:

Australians each year spend about A$20 billion… more abroad than international tourists do Down Under – money that's now being spent locally as the border remains shut to keep out Covid-19. Also locked out are the around 15% of the labor supply in hospitality and food trades that are usually drawn from overseas workers.

Which ASX shares have the most to fear from higher rates?

The inflation and interest rate question really comes down to a matter of degree.

If inflation is within the RBA's target range or even slightly above, any interest rate rises will likely remain subdued. Furthermore, this would occur without majorly impacting ASX shares.

But what if inflation begins to run hot following the past year's unprecedented fiscal and monetary largesse? Then we could be in for some larger rate rises which will impact the ASX.

Though not all shares will feel the pain equally.

According to Wentworth Williamson fund manager James Williamson (quoted by the Australian Financial Review):

The higher-priced companies have dropped recently because you're heading towards a world of interest rates heading off the lows. If you're looking at a world where the cost of capital is rising, it's terrible for these very high priced companies that don't make a lot of money.

ASX banks shares are often pointed to as likely to do better in a world of rising rates. While ASX tech shares, more heavily dependent on future earnings, are generally expected to struggle. In particular if they are faced with a higher present cost of money.

Should you invest $1,000 in Commonwealth Bank Of Australia right now?

Before you buy Commonwealth Bank Of Australia shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Commonwealth Bank Of Australia wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

Man smiling at a laptop because of a rising share price.
Opinions

My 2 favourite ASX sectors to invest in

Finding your groove can help your investing success.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
Opinions

3 things I learned from Warren Buffett being the CEO of Berkshire Hathaway

The Oracle from Omaha is in his last year as CEO.

Read more »

A male ASX 200 broker wearing a blue shirt and black tie holds one hand to his chin with the other arm crossed across his body as he watches stock prices on a digital screen while deep in thought
Share Market News

5 things to watch on the ASX 200 on Tuesday

Here's what to expect on the local market today.

Read more »

A neon sign says 'Top Ten'.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a rough trading day for ASX stocks this Monday.

Read more »

A bland looking man in a brown suit opens his jacket to reveal a red and gold superhero dollar symbol on his chest.
Broker Notes

Bell Potter names more of the best ASX 200 stocks to buy in May

These stocks could be best buys this month according to the broker.

Read more »

A financial expert or broker looks worried as he checks out a graph showing market volatility.
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers believe that now could be the time to snap up these shares.

Read more »

Oil worker using a smartphone in front of an oil rig.
Energy Shares

ASX 200 energy shares plunge on shock OPEC move

ASX 200 energy shares like Woodside and Santos are tumbling on Monday. Let’s find out why.

Read more »

Two happy excited friends in euphoria mood after winning in a bet with a smartphone in hand.
Share Gainers

Why 4DMedical, Gold Road, Syrah, and Tyro shares are racing higher today

These shares are starting the week strongly. But why?

Read more »