It was a positive month for domestic investments markets, with the All-Ordinaries index gaining 1.7% for the month and closing at 7,501.0 points. The Australian Dollar was once again weaker, falling by 1.1% for the month, with 1 Australian Dollar buying 66.2 United States cents.
The Reserve Bank of Australia (RBA) Board held the official Cash Rate at 3.60% per annum in April. This was the first “hold” on rates following 10 consecutive RBA board meetings whereby rates have increased. The RBA Board meet again on Tuesday, with recent inflation results providing hope that we have seen the end of the rate hike cycle.
Global share markets returns were generally positive in April, with the United States Dow Jones Index gaining 2.5%, the London FTSE gaining 3.1%, the Japan Nikkei 225 gaining 2.9%, and the Hong Kong Hang Seng Index falling 2.5% for the month.
Australian inflation numbers released last week show a 7.0% annual inflation rate (down from 7.80% in December) and falling fast towards 4.0% by the end of the year. Declining inflation, and a likely new RBA governor in September, should also help the Cash Rate stay on hold for the rest of 2023.
The chart below shows the annual inflation rate in the United States and Australia over the past 10 years.
Source: Tradingeconomics.com
Why Is Inflation Coming Down?
As goods supply chains have normalised from COVID-19 lockdowns, so have the pressures on prices. Having grown by more than 10% in 2022, the prices of goods are now almost flat lining. Business as usual should result in goods inflation moving back to the 1.5% per annum rate achieved over the past few decades.
The only known “unknown” for now is possibly more Russian aggression in Ukraine over the northern hemisphere summer, which some experts are predicting. We can only hope that that is not the case.
In essence, the passing of time has taken care of goods prices. It is arguable that this would largely have happened irrespective of monetary policy actions (i.e. interest rate increases). However, goods make up only about a third of our expenditure. The problem now may be services inflation.
Two-thirds of the Consumer Price Index come from services, and services inflation is now closer to 6% per annum, with wages continuing to boost costs and therefore prices. This means overall inflation is settling down to an annual pace of about 4.0%.
The problem, of course, is that a 4.0% annual inflation rate is higher than the RBA target inflation range of 2.0% to 3.0%. So there remains some scope for the RBA to keep hiking rates in the short-term.
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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.