May 2022 Investment Market Update

Good afternoon,

As you are no doubt aware, inflation in all the major economies around the world is increasing. The United States economy recorded an annual inflation rate of 8.5% up to the end of March. This is the highest inflation rate since 1981.

The inflation figures for April in the United States will be released this evening. In Australia annual inflation is running at 5.1% but is likely to trend higher. It’s important to remember that a year ago, inflation in Australia was running at 1.1% for the year.

So the changes are significant and profound.

The rises in inflation have been caused by both supply and demand changing.

Economies were artificially stimulated during Covid lockdowns by governments handing out money and record low interest rates, the money supply increased and looked for a home.

Following the end of lockdowns, we have all been spending more however, supply is constrained by China’s continuing ludicrous lockdown policies and the Russian invasion of Ukraine.

So we have a lot of money chasing fewer goods and the result is inflation. The key way to control this is to increase interest rates by reducing the supply of money.

The Reserve Bank in Australia had said only six months ago they would not be increasing interest rates until 2024.

They got that embarrassingly wrong in the RBA governor’s own words.

Last week they started increasing rates and the Cash Rate is now at 0.35%.

Shane Oliver, the Chief Economist at AMP, in the attached article, says rates will rise to 2% by the end of the calendar year.

However, if inflation surprises on the upside, this number will be higher.

(The article attached goes into the likely outlook for interest rates in more detail)


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