ASX 200 turns green on softer-than-expected inflation data

The ASX 200 has been given an unexpected boost today.

| More on:
A man holds his baby on his lap at the dining room table while he looks at his laptop screen earnestly.

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

Well, it's been an interesting day for the S&P/ASX 200 Index (ASX: XJO) so far this Wednesday, to say the least. The ASX 200 started off on a fairly negative footing this morning. 

The Index closed at 7,034.1 points yesterday but quickly fell as low as 7,011 points soon after market open this morning. In fact, the ASX 200 was in red territory until about midday today.

But as it currently stands, the Index has gained 0.11% and has risen up to 7,042 points at the time of writing:

So why this dramatic change of heart from investors today?

Well, the ASX's pivot from red to green territory almost perfectly coincides with the latest inflation data out of the Australian Bureau of Statistics (ABS). So that could have something to do with it.

This morning (just before midday), the ABS released its latest consumer price index (CPI) figures. And they make for some interesting reading. Over the 12 months to 28 February, the Australian economy endured inflation of 6.8%.

That might seem like a lot (and it is, historically). But over the 12 months to January 2023, inflation was running at 7.4%. That means running annual inflation has slowed from 7.4% to 6.8% in just one month.

Now cooling inflation usually means a cooling economy. This is exactly what the Reserve Bank of Australia (RBA) wants, considering the ten interest rate rises in a row we have just had.

So why might investors be excited over this latest inflation data, considering it might be reflecting a slowing economy?

Why might lower inflation lead to higher ASX shares?

Well, this turnaround in sentiment we have seen on the ASX probably isn't about inflation itself, but what lower inflation might mean for interest rates. If inflation is slowing (which it seems to be), the RBA might consider pausing its ten-month streak of raising interest rates. 

Interest rates are bad for almost every asset outside cash. They slow the economy down and make growth assets like shares less attractive to investors compared with 'safer' alternatives like term deposits.

Over 2020 and 2021, interest rates were effectively zero. This meant that a term deposit or savings account would have yielded you 1% if you were lucky. So if you wanted to chase a better return than that, the share market was one of the only options.

But today, you can get a term deposit at a 5% interest rate or even higher. That makes the prospect of investing in shares a lot less appealing for many investors.

So that's why investors hate high interest rates. Thus, it's understandable why today's inflation data is giving investors confidence in the share market.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. 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 Scott Phillips.

More on Economy

Woman and man calculating a dividend yield.
Share Market News

What ASX 200 investors just learned from the RBA's interest rate minutes

Will ASX 200 Index investors get interest rate relief before Christmas?

Read more »

Man looking at his grocery receipt, symbolising inflation.
Share Market News

What the latest US inflation print means for ASX 200 investors

The ASX 200 is likely to benefit if the US Fed cuts interest rates again in December. But will it?

Read more »

A woman sits in a cafe wearing a polka dotted shirt and holding a latte in one hand while reading something on a laptop that is sitting on the table in front of her
Economy

Consumer confidence is rising. What does it mean for ASX shares?

Consumers gonna' consume.

Read more »

A smiling woman dressed in a raincoat raise her arms as the rain comes down.
Economy

History says ASX shares will do this once interest rate cuts begin

Like sunshine on a rainy day, the data shows mixed outcomes.

Read more »

Four investors stand in a line holding cash fanned in their hands with thoughtful looks on their faces.
Economy

Up 20% this year. Does the S&P 500 Index have more in the tank for 2024?

Will US stocks hold up after the election?

Read more »

A woman sits in a cafe wearing a polka dotted shirt and holding a latte in one hand while reading something on a laptop that is sitting on the table in front of her
Share Market News

ASX 200 takes the latest RBA interest rate verdict in stride

The ASX 200 looks to have shaken off today’s RBA interest rate call.

Read more »

Cubes with tax written on them on top of Australian dollar notes.
Tax

How much tax do your ASX shares pay? Why it might matter

Taxes. One of the two unavoidables in life.

Read more »

A man looking at his laptop and thinking.
Share Market News

ASX 200 retreats on September Aussie inflation print. Here's why

ASX 200 investors are pulling back following Australia’s latest CPI data.

Read more »