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Making sense of inflation headlines

Written and accurate as at: Aug 26, 2021 Current Stats & Facts

The Australian Bureau of Statistics said the consumer price index, a comprehensive measure of goods and services price inflation, rose by 3.8% in the 12 months to the end of June 2021. This was the biggest rise since the third quarter of 2008.

The statistician cautioned that base effects had contributed to the result as the CPI for the June quarter of 2020 had been held down by pandemic-related one-off effects, including the introduction of free childcare and a record fall in fuel prices.

In core terms, stripping out seasonal and temporary measures, inflation remained below the bottom of the Reserve Bank of Australia’s 2-3% target band, the bureau said.

Nevertheless, the Australian CPI result, coming on top of similarly eye-popping numbers in other major economies, was enough to trigger a flood of media commentary about the implications for investors of rising inflation and inflation expectations.

In one financial daily, a commentator wrote that despite assurances that the price jump would be transitory, investors had reason to be concerned that “unprecedented” policy stimulus would have a “very unpleasant after-effect in the form of rising inflation”.

Obviously, it would be nice to know whether the recent spike in inflation will prove to be anything more than a blip. But the fact is nobody really knows. Markets have already absorbed the news to date. And as new information emerges, expectations can change.

You only have to look at what has happened in the global bond market to see evidence of that. In March this year, US 10-year bond yields spiked to their highest level in more than a year above 1.7% on signs of rising inflation and increasing economic activity.

But yields then proceeded to backtrack in the second quarter as worries about higher inflation led to concerns about faltering economic growth.

The fact is inflation is only one of many factors that investors collectively take account of. Each day, there is news of progress or otherwise in vaccinations, earnings results, merger and acquisition activity, policy measures and economic activity data.

Virus outbreaks and resulting lockdowns have focused on the implications for economic growth. The Reserve Bank has already flagged it expects GDP to decline in the current quarter.  This was further compounded with RBA surprising expectations reporting wages growth in the June quarter fell to just 0.4 per cent, which is on par with the depths of the global financial crisis. 


With wages only growing 1.7 per cent over FY2021, it is increasingly unlikely the Reserve Bank will raise interest rates given it is far from the 3 per cent level the Reserve Bank believes is necessary for inflation to meet its target band.

Many people are naturally anxious with uncertainties over health outcomes, the pace of the vaccine rollout, the future of border re-openings, and what this might mean for earnings, investment, consumer spending, and prices in the months ahead.

For investors, there are a few points to make about this. The first is that the future will always be uncertain. There is always something to worry about. In fact, investors’ willingness to bear uncertainty is why there is the opportunity of return.

The second is that attempts at market timing – trying to get in or out of the market based on the latest economic data does not have a perfect record of success. And even if you get your exit right, you have still to decide when to get back in.

The third is that solid evidence suggests that remaining invested in a diversified portfolio over the long-term is more likely to give you a better outcome anyway, helping you outpace inflation and ride through the bumps.

The final point is that your first guide to what the future may hold is the market itself. Data releases are hitting our screens every day – on inflation, growth, manufacturing activity, unemployment, investment. Market prices, reflecting the collective best guess of millions of investors, already reflect this information.

Just staying invested may be the best strategy of all. Adjusted for inflation, $100,000 invested in the S&P/ASX 300 index grew to about $1,500,000 in the four decades since 1980. 

 In summary, news of the recent spike in inflation in Australia was quickly absorbed by market participants who are always looking ahead to the next thing. Whether inflation will prove transitory, as central bankers assure us, no one can tell for sure.

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