The biggest price inflation shift

Delivered on By Justin Pyvis

Good morning! Queensland’s human rights commissioner warned against the state government’s attempt to extend its emergency pandemic powers for another six months, cautioning that:

“At present, confusion over whether or not the CHO’s public health directions are legislative or administrative in nature means that they exist in a potential vacuum of oversight.”

The commissioner suggested that given that the pandemic’s emergency phase is “arguably behind us”, the government should instead replace the powers with a more “effective and open, transparent model”.

Fair enough. As the president of the Queensland Council for Civil Liberties told the same parliamentary committee:

“If it does justify such an extension, it would justify an extension of those powers for so long as the virus is circulating in our community, which given the current state of our medicine will be forever.”

The emergency is over, so let’s ditch the emergency powers.


Reading the tea leaves

Daily % change

AUD/USD

72.0

-1.4%

AUD/CNY

4.58

-0.9%

AU Bond

2.51

+6.5%

US Bond

2.14

+6.8%

ASX200

7,149

+1.2%

S&P500

4,173

-0.7%

Brent (bbl)

106.1

-5.9%

Gold (oz)

1,955

-1.4%

Iron ore (t)

146.2

-7.3%

Bitcoin

38,848

+2.6%

Ethereum

2,542

+0.9%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

TheΒ US S&P500Β started the week with a -0.74% decline led by tech (Nasdaq -2.04%) as the focus shifted from Ukraine towards the US Federal Reserve’s meeting on Wednesday, during which it’s expected to raise interest rates for the first time in three years.

The price of bonds and oil fell as optimism grew about peace talks between Ukraine and Russia, which appear to be tentatively progressing. Tech stocks are particularly sensitive to interest rates as it’s how their future income is discounted back to the present.

Locally, theΒ ASX200 added 1.21% with every sector rising except materials (-0.34%), which dropped after China’s National Development and Reform Commission announced that it “wants to boost domestic production capacity [of coal] by about 300 million tons… [to] dramatically reduce its reliance on imports”.


Food for thought

Inflation is a regressive tax that hits those who can least afford it the hardest.
Inflation is a regressive tax that hits those who can least afford it the hardest. Source

Consumer price inflation tends to be highly regressive. That is, those on the lowest incomes (which are often fixed) with the fewest assets and debt (which decreases with inflation), tend to see the greatest reductions in living standards.

Inflation is already running very hot in Australia – likely over 5%, despite the official measure showing ‘only’ 3.5% in the December quarter. Quarter-on-quarter prices increased by 1.3%, which corresponds to an annualised inflation rate of 5.3%, and that was before the 24% increase in the price of oil this quarter before Russia even invaded Ukraine!

Another reason to suspect that the official inflation data are well behind reality is because of lived experience and frequent anecdotes of rising prices. Yesterday’s AFR reported a story from SPC’s Robert Giles – SPC supplies around 100 household staples to Aussie supermarkets – in which Giles claimed that:

“We are seeing probably the biggest price inflation shift that I’ve ever seen in my career coming through. We’d be out of business really quickly if we didn’t pass these prices on because they’re just so significant.”

Rising fuel prices have taken a toll but the cost pressures he’s witnessing are broad-based – packaging and product costs have also soared, “including wheat prices pushing up the price of spaghetti”.

Russia’s invasion of Ukraine has played a role – the oil price is now up over 40% this quarter – but the price of everything was rising rapidly much earlier than that. Global food prices have been setting fresh record highs since at least April 2021, and we covered the issue again in November 2021 when it appeared the world was entering an environment “eerily similar to that preceding the 2007/8 global unrest”.

The next Australian CPI data release isn’t for another 6 weeks, and even that will average price increases over the January - March period, flattening the steepness of the curve during a period of rapidly increasing prices.

There’s a good chance that the Reserve Bank of Australia (RBA) is going to be completely blindsided by inflation when it belatedly hits the official index. If that happens, expect a swift hawkish pivot as it attempts to play catch-up (but not until after the federal election, of course), possibly triggering a recession in the process.


Chewing the fat


Bits and bytes

πŸ‘΅ Aussie pensioners will be getting a 2.1% boost to their payments from Monday, the largest percentage rise since 2013, but it will be cold comfort when the price of goods and services are rising twice as fast.

🌊 “NSW made three formal requests for the ADF to help in flood-ravaged Lismore but was offered fewer than 300 on the same day the federal government said it had 2,000 ready to go if requested.”

❌ Censored comments from China’s Hu Wei imply that it has “one or two weeks” to support or condemn Russia, and that because the prospect of Putin securing victory “looks bleak at the moment”, China should unload “the burden of Russia as soon as possible”.

πŸ™‰ China’s US Embassy said it had “never heard of” a request from Moscow for military aid, hours after the New York Times “quoted US officials as saying that Russia had sought economic assistance from China as a way to deal with crippling Western sanctions”.

🏭 The UK “government is exploring whether old coal-fired power stations that are due to close this year could be kept open to ease the energy crisis”.

πŸ›’οΈ “India is considering taking up a Russian offer to buy its crude oil and other commodities at discounted prices with payment via a rupee-rouble transaction.”

🀏 Shrinkflation: “Frito-Lay confirmed that it decreased the number of chips you get per bag by five whole delicious triangles in 2021 in order to account for inflation.”

🏈 Tom Brady un-retired from football and will re-join the Tampa Bay Buccaneers for what will be his 23rd season in the NFL.

πŸ₯ New Zealand’s government will cut fuel taxes by 25c a litre for the next three months and halve public transport fares.

🀳 A group of Lithuanians started a “#CallRussia project with a database of 40 million numbers of Russian individuals… Tomas, a volunteer… who made around 50 calls in an evening, said that all but one Russian hung up on him or refused to speak at any length.”

πŸ“ˆ Elon Musk tweeted: “Tesla & SpaceX are seeing significant recent inflation pressure in raw materials & logistics. And we are not alone.”

βš”οΈ Speaking of Musk, he used twitter (what else) to challenge Vladimir Putin to “to single combat… Stakes are Ukraine”.

πŸ’‰ Pfizer’s CEO said a fourth dose of a COVID-19 vaccine will probably become standard because while three doses “is good enough, actually quite good for hospitalisations and deaths, it’s not that good against infections”.

πŸ” China’s government locked down yet another city due to a jump in coronavirus cases, this time tech hub Shenzhen (population 17.5 million), forcing iPhone supplier Foxconn to halt production.

πŸ›‚ Asked whether he would ever reimpose COVID-restrictions, NSW health minister Brad Hazzard said: “Everybody is over it, putting it bluntly.”

πŸ—³οΈ The European Union “voted for a uniform legal framework for crypto-assets in the European Union”, rejecting at the last minute a proposal that would have seen the energy-intensive process called proof-of-work, used by Bitcoin, banned.