Australia is experiencing record levels of inflation as a result of knock-on effects from the COVID-19 pandemic, Russia’s invasion of Ukraine and strong consumer demand.

In January, the ABS revealed that Australia’s inflation rate had risen 7.8% for the year to December—the highest level since 1990—while quarterly inflation was up by 1.9%. This figure was slightly higher than many economists’ forecasts of around 7.5%, however, was in line with Treasury estimations that inflation would peak around 8% by the end of 2022.

According to the ABS figures released on January 25, annual inflation for year to December was being driven by a steep rise in the cost of new dwellings, up 17.8%; domestic holidays, travel and accommodation, up 19.8%; and fuel costs, up 13.2%.

So with inflation set to stay for a while, what impact does inflation have on shares and property?

Generally speaking, higher inflation will often lead to higher interest rates, which can then lead to a decrease in consumer and business spending, and ultimately lead to a decrease in share prices. On the other hand, higher inflation can sometimes lead to an increase in corporate earnings, as companies pass on their increased costs to consumers in the form of higher prices, which can lead to an increase in share prices.

So why have mining stocks performed so well?

Rising inflation can also have a positive impact on mining stocks. When inflation is rising, the prices of commodities, such as minerals and natural resources, may increase as the cost of producing and transporting them increases. This can lead to higher profits for mining companies and a corresponding increase in the value of their stock. The recent performance of Woodside, BHP, RIO, FMG etc is a testament to this.

As Australia’s mining stock representation (within the ASX300) is disproportionately higher than most other developed nations, diversified Australian investors and superannuation members have benefited greatly from this, minimising last year’s share market losses.

However, it is worth noting that the impact of inflation on mining stocks can be influenced by many factors, such as global demand for the commodity, supply and demand dynamics within the specific market, geopolitical risks, and currency fluctuations. Additionally, if inflation leads to higher interest rates, increased borrowing costs can negatively impact corporate profitability, which can in turn lead to a decrease in the value of mining shares.

…and real estate?

As for real estate, higher inflation can drive up property prices as the cost of construction and raw materials increases. However, if inflation leads to higher interest rates, it can also make it more expensive for individuals to take out mortgages, which can negatively impact the demand for property and lead to a decrease in property prices.

Overall, the impact of inflation on financial markets is complex and depends on many factors, including the rate of inflation, interest rate policy, and the state of the overall economy.

If you’re not sure whether your strategy is fully taking advantage of the new inflationary environment, seek advice.

Rick Maggi