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Could inflation now be fully priced in to ASX 200 shares?

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Many S&P/ASX 200 Index (ASX: XJO) shares have seen much volatility in recent months, partly due to inflation. But, have investors now factored inflation into their investment thinking?

Current inflation levels have been driven by a number of factors. One has been the rising cost of fuel. This coincided with the Russian invasion of Ukraine that saw the oil price jump several months ago, but the oil price has been falling in recent weeks.

As well, many other commodity prices have dropped noticeably in recent times, such as iron ore and copper.

Analyst thoughts on inflation

No one can truly know what’s going to happen next. But, analysts can put together various pieces of information to get a good reading of what the next reported inflation figure may be. This, in turn, could help analysts predict what central banks may need to do to bring inflation under control.

According to reporting by the Australian Financial Review, NAB analysts said the following in a research note to clients last week:

The recent fall in oil prices, which are now trading below the levels immediately before Russia’s invasion of Ukraine, has contributed to the market’s perception that inflation is likely to peak soon.

NAB noted that the effect of lower resource prices will mean that the US Federal Reserve won’t need to increase interest rates as much in its bid to bring inflation down.

However, it was reported that the president of the Cleveland Federal Reserve, Loretta Mester, said the US cash rate could reach more than 4% to combat inflation.

Another factor that could impact inflation is China. The nation is a largest importer of Australian iron ore. In recent times, ongoing COVID-19 restrictions have slowed the Chinese economy. There is also uncertainty surrounding the Chinese property market with some people deciding not to pay their mortgages.

Regarding China, NAB said, according to the AFR:

After initial hopes China will step in to support its property sector, the lack of details is now raising concern over the demand for steel amid the prospect of a more subdued economic recovery which also remains clouded [on] Beijing zero-COVID policy.

How much further will the RBA increase interest rates?

At the start of August, the Reserve Bank of Australia (RBA) decided to increase the interest rate by 50 basis points (0.50%) to 1.85%.

The RBA board said that it “places a high priority on the return of inflation to the 2% to 3% range over time, while keeping the economy on an even keel”. The RBA noted inflation in Australia is the highest it’s been since the early 1990s.

It said there are widespread upward pressures on prices from strong demand, a tight labour market, and capacity constraints in some sectors of the economy. The floods earlier this year are also affecting some prices.

The RBA is expecting inflation to peak later this year.

Talking about expectations about interest rate increases, the RBA said:

The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market. The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.

However, the interest rate increases are widely anticipated by investors, so ASX 200 shares may have already fully priced this in.

Source: Read More

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