Inflation is a double edged sword and Central Banks do everything in their power to keep inflations in check at desirable levels. The Australian economy was slowing down much before Covid-19 hit, and the pandemic later tipped the economy into a technical recession. In order to increase economic activity and drive growth, monetary policies have resulted in the reduction of interest rates to lowest levels we have seen, quantitative easing has been taken up and money has been introduced into the system in the last couple of budgets not just in Australia, but globally.
These fiscal policies have us looking over our shoulders once more. The inflation rate in Australia looks set to rise over the coming years, and when inflation rates rise, investors start to worry.
Here are our reasons why we think Inflation will increase sharply as we try and bounce back from this economic slump that we find ourselves in
Unemployment and inflation has had an inverse relationship historically. Both these measures are very important to track the macro economic forces that are at play. As economic activity is boosted, unemployment should decrease. This creates a slight imbalance as increased economic activity creates an excess supply of jobs – leading to inflation as employers will need to pay higher wages to attract employees.
This is a primary target for all governments around the world. The Australian federal government has been pumping in money in order to revive a sleeping economy. There has been plenty of fiscal stimulus that has been introduced, lending has been very liberal, and interest rates are forecasted to stay low and may go even lower. These measures result in a lot of cheap money being available in the economy, and when money is cheap, consumer prices go up – leading to higher inflation.
Central Banks move levers that are in their control with an objective to keep inflation rates in check. In order to revive a slowing economy, central banks will want to keep inflation levels higher than usual. Australia inflation has seen somewhat of a very low point prior to the pandemic. Going forward, we expect the central banks to keep inflation much higher to bring the economy back to where it should be.
Inflation affects stock prices and some sectors are more sensitive to inflation than others. At Shares in Value, we will keep you updated and help steer you away from negative market movements.