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Inflation on track, ASX shares rise

Tristan Harrison
Inflation chart

ASX shares represented by the ASX 200 (ASX: XJO) and the All Ordinaries (ASX: XAO) are up after the Australian Bureau of Statistics (ABS) released the latest inflation data.

Overall CPI inflation rose by 0.7% in the December 2019 quarter, compared to the September 2019 quarter. The biggest contributors for the quarter were tobacco (up 8.4%), domestic holiday, travel and accommodation (up 7.3%), automotive fuel (up 4.4%), and fruit (up 6.8%).

However, there was also areas of deflation. The biggest deflation areas were international holiday, travel and accommodation (down 2.9%), garments for women (down 2.5%) and wine (down 1.6%). Seeing the wine price change is interesting timing considering what just happened with the Treasury Wine Estate Ltd’s (ASX: TWE) update.

Over the past year overall inflation has been 1.8%, and this quarter’s rise of 0.7% is an annualised 2.8%, though I wouldn’t expect inflation near 3%, it’s much more likely to be near 2%. The Reserve Bank of Australia’s (RBA) target is for long-term annual inflation of 2% to 3%, so this quarter is just what the RBA is looking for.

Combined with the recent news of a lowering unemployment rate, it is now very unlikely that the RBA will cut interest rates in February.

Maybe some investors will be disappointed that lower interest rates won’t push asset prices even higher, but that’s a pretty short-term view. Interest rates are meant to be higher than today to properly reflect risks. Low interest rates make it harder for banks like Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) to maintain the same profitability.

The RBA can’t really dictate what happens with prices in the supermarkets of Woolworths Group Ltd (ASX: WOW) or Coles Group Limited (ASX: COL). It can’t control drought or food demand which affects Bega Cheese Ltd (ASX: BGA) or Costa Group Holdings Ltd (ASX: CGC). It can’t stop the US almost going to war with Iran, causing petrol prices to go up from businesses like Viva Energy Group Ltd (ASX: VEA) or Caltex Australia Limited (ASX: CTX).  

As a result of these numbers, it’s quite possible that interest rates will stay at the same rate for the rest of the year.

The post Inflation on track, ASX shares rise appeared first on Motley Fool Australia.

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Motley Fool contributor Tristan Harrison owns shares of COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and Treasury Wine Estates Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020