Is Anyone Talking About Inflation Risk?
Dear Investor Club reader,
Overnight, the USA’s Federal Reserve increased interest rates by another 0.25% to 2.25%.
The Fed is putting its (or their country’s) money where their mouth is.
You see, for months they’ve been telling investors to expect higher interest rates.
Now they’re telling us to expect even more. Lots more. Reuters reports, “The U.S. central bank still foresees another rate hike in December, three more next year, and one increase in 2020.”
So what does Fed interest rates have to do with the price of tea in… err… Australia?
Hold On To Your Hats
A few weeks ago I wrote that changes in US interest rates are putting pressure on our banks. Forget the Royal Commission, rising US rates is one of the big reasons mortgage rates in Australia could go higher.
Now, if you’re looking for a daily dose of doomsaying, be sure to visit my friends at 60 Minutes, who last week wrote “bricks and slaughter” and “we’re all to blame for [the] looming housing market crash”.
I rarely — by that I mean, maybe once every second full moon — tune into the financial news. I loathe every minute of it.
Fortunately, this week, I got my bearish hit from my local post office manager.
“If the US keeps raising rates, the Aussie dollar will fall and then inflation will come back!” he warned.
If this, then that.
It sounds more like computer code than reality.
But the tough truth is that if inflation comes back Australia’s reserve bank (RBA) could be forced to raise interest rates to keep a lid on the costs of everyday items.Then, homeowners and property investors would be hit with a double-whammy.
Meaning, not only will the USA’s Fed increase rates (which they seem bent on doing anyway), Australia’s RBA could be forced to step in.
If this, then that… means Aussie interest rates go up again.
I know. I know. I should start applying for a job at Channel 9, right?
But if you don’t believe me, check out the price of petrol — I paid $1.60 this week!
Fuel prices are at 4.5-year highs. Yes, Government taxes on fuel are hefty — up to 50 cents a litre when you’re paying $1.38 at the bowser (according to RACQ).
But the underlying drivers of fuel prices are overseas producers and “a lower Australian dollar”, ACCC Chair Rod Sims said in the watchdog’s latest quarterly report.
So who gives a fluff?
Fuel prices affect your daily spend. But you can also think about this way: the price of fuel also affects how much it costs to transport things around the country and ultimately the price of most consumer goods.
Time For Some Good News
Ok, so I’ve painted a scary picture.
But it’s not all bad. Here’s why:
Firstly, after falling back from $1.10 in 2011 the Australian Dollar is now hovering around its long-term average.
Second, Australia has low inflation. Sure, inflation has crept up from 1% in June 2016 to 2.1% in June this year. But that’s still at the low end of the RBA’s target range.
Thirdly, there are many simple ways to try and make your money work harder in a rising inflation/interest rate environment…
You could invest abroad as I do. For example, I recently bought 2 US-listed shares for the Rask Invest model portfolio – one of them is up 22% and the other almost 7% (in Aussie dollars). Not a bad performance for just a few months!
I think another easy way to counter inflation is to buy shares in ASX businesses that have pricing power. Pricing power means they can pass on the extra costs of doing business to their clients.
I often use the word “sticky” to describe these businesses. For example, a good company should be able to increase the prices of its products by, say, 8% per year and its customers still stick around. That kind of pricing power means it can weather tougher economic times. Again, the 5 companies in my model portfolio have very loyal customers — many of whom are located overseas.
Finally, I recently bought shares in a tiny under-the-radar company that seems to be trading far too cheaply. Especially when we consider it has never lost a customer, according to its co-founder. That’s why I bought shares for my portfolio this week.
For the record, my family’s wealth would still be affected by rising inflation. But by strategically allocating my money to the best all-weather ASX and global shares I can find, I stand a pretty good chance of compounding my wealth.
So far, I think it’s fair to say the strategy has paid off handsomely.
(note: since Rask Invest launched in June 2018 one of my portfolio pocket rocket share ideas has trounced the ASX — it’s up more than 50%!)
Cheers to our financial futures!
Lead Adviser, Rask Invest
Performance disclaimer: Remember, past performance is not a reliable indicator of future performance. Returns cited in this update are calculated using total returns (share prices + dividends) in Australian dollars, excluding fees and taxes. Return calculations are based on the date of the investment idea and are believed to be accurate at the date of publishing. Returns are hypothetical. Share prices can go up and down.