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What to expect when you're expecting inflation: Editor's Note

Emma Rapaport  |  23 Oct 2021Text size  Decrease  Increase  |  
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I'm an avid consumer of fruits and vegetables. I have my parents to thank for that, ending every meal with a round of apples or oranges. But lately, I've started to feel this is more of a treat than a healthy choice.  

My supermarket bill hit $100 last week, the highest it's been in a long time. Sure, my eating habits may have changed somewhat coming out of lockdown, but week to week they remain relatively static.

A recent report from Morningstar Australia predicts that inflation will stage a comeback in fiscal 2022, modestly pushing up prices at the supermarket. Have you noticed petrol prices are insanely high? That impacts the suppliers like Nestle and Unilever who use fuel in their transport and packaging operations. What about delays from online shopping? Large global suppliers have sounded the alarm on inflationary pressures citing bottlenecks in supply chains and other pandemic-related factors like labour shortages.

Many argue inflationary pressures will be temporary, the result of several post-pandemic one-offs. But others, like former Treasury Secretary Larry Summers, warn the US economy is in danger of 'overheating' as large-scale Federal Reserve purchases and fiscal stimulus push up prices.

Prices of vegetables and fruit both rose in the June quarter due to a shortage of pickers and extreme rainfall

Source: Australian Bureau of Statistics.

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Inflationary pressures are important for investors in our nation's largest supermarkets to track. When prices go up, consumer habits charge, substituting pasta for meat, switching from upscale stores to discount, purchasing in bulk to avoid price shocks. But there are larger implications too. 

2021 study by a group of US economics professors found that price changes in groceries have an outsized impact on people's expectations about inflation. The findings suggest that if we see a bag of apples increase $1 from one week to the next, we assume prices are going up across the economy. The reason has to do with the frequency of purchase. While our rent may increase from year to year, the frequency with which we see a certain price is more impactful – e.g the price of apples – even though housing costs represent a larger share of our cost of living.

"We found that when people are asked about price levels in general, not about grocery prices in particular, their brain tends to go to 'well, what prices did I recently see', oh there was a lot of increase [at the supermarket], and therefore they tend to generalise it and apply to their general views of the economy and where prices are," report author Ulrike Malmendier said on a recent podcast.  

This expectation effect was found to be more pronounced for women than men as they tend to do a larger share of grocery shopping, and as such, experience price signals more often #progress.  

When it comes to inflation, expectations matter. They matter because consumers' expectations influence decisions that are made around wages and price settings. If everyone expects prices to rise 5%, businesses will find it easier to raise prices by 5%, if not more.

This is why we take notice when Summers or the Bank of England chief economist raise concerns about rising inflation. If allowed to run, inflationary pressure can force aggressive action on interest rates, affecting all investments, all investors everywhere.

In Australia, the RBA has consistently said it is not concerned about inflationary forecasts and will not adjust the cash rate until 2024. But as the governor has made clear, if actual inflation increases into its two to three per cent target, and they are confident it will remain in this band, it will raise rates earlier.

While the September quarter CPI numbers are due out next week, I'll be waiting for the next round of inflation expectation results due out in December.

More on this topic:

Supply chains may not mend till mid 2022

Why the market thinks interest rates are too Lowe

How to protect your portfolio from inflation

******  

This week, global investors watched with keen interest the launch of the world's first bitcoin-tracking exchange-traded fund - the ProShares Bitcoin Strategy ETF (BITO). It appeared to live up to the hoopla, gaining $550 million in assets on its first day of listing – one of the largest takes for an ETF on record. On day two, assets topped $1.1 billion. Katherine Lynch charts BITO's first dayBen Johnson notes the fund (and several others waiting in the wings) will invest in bitcoin futures, not bitcoin itself. Invest at your own risk.

There has been extensive coverage of the $1.2 billion the Federal Government paid to five consulting firms in FY21, especially after cuts to public servant numbers. Graham Hands looks inside the guidelines of a consulting firm to learn how they bill for their assignments. The document might help anyone who deals with a professional who charges by the hour.

AGM season is in full swing and this week we heard from Tabcorp, Brambles, Endeavour Group, and Magellan Financial Group, to name a few. Lewis Jackson explores how climate activists are stepping up the pressure on companies over their climate change policies. And still on climate, are stranded assets an unexploded bomb? Cherry Reynard writes how many assets will be uneconomic in a low carbon world affecting sectors from commercial property to tobacco.

Finally, Moningstar's new director of manager research ratings Annika Bradley gives us the lowdown on fund fees in the first of a three-part series.

More from Morningstar:

Energy windfall highlights the promises and perils of contrarian investing

3 reasons why Monash thinks ETFs trump LICs

Is green hydrogen an opportunity for investors? Charts of the week

 

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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