Over recent months the debate has continued between central bankers and the general market about whether recent price hikes are likely to be transitory or something more permanent. For the moment at least, the argument is being won by the central bankers who maintain that today’s inflation spurt is due to nothing more than the unleashing of considerable pent-up demand, which is likely to be temporary, and will gradually revert back to a more reasonable level.
This had been the view of our own Reserve Bank of New Zealand, who as recently as their 26 May monetary policy statement that “a range of domestic and international factors are expected to lift headline inflation above 2% for a period, but these factors are expected to be temporary”. Since then the expectation by most commentators has been the Reserve Bank will lift the official cash rate sooner rather than later.
What’s been conspicuous over the most recent quarter is that equity investors don’t appear to have been remotely distracted by this debate. Even if there may be a little more inflation on the horizon, it generally means the prices most businesses are charging for their goods and services are going up. That’s not necessarily a bad thing for future business profitability!
Of course, it’s not quite that simple. Cost pressures, supply constraints and other factors will all have a role to play in influencing corporate profitability, but a small uptick in prices does not, in itself, mark the death-knell for equities.
First published: July 2021