What we learned this week: Morningstar Investment Conference edition
Three things we learnt about inflation at MICAU 2022.
On Thursday Morningstar held its annual individual investor conference. The conference hosted numerous speakers who talked on a range of topics, from asset allocation to the current economic environment. Head of Morningstar equity research Peter Warnes and chief economist at AMP Capital Shane Oliver both spoke about inflation, leaving the audience with pearls of wisdom.
Here are three things we learnt about inflation at Morningstar’s investment conference.
1. Supply side inflation also has a demand side story
In his session on Thursday, Oliver explained that current inflation is not only the result of supply shocks but is the outcome of strong demand, thus causing the RBA to hike rates.
“A lot of people say, well what’s the point of the reserve bank raising interest rates, what can it do about the $10 lettuce?” said Oliver.
He acknowledged that there isn’t much the RBA can do about the price of lettuce but explained that growing consumer demand for goods and services had pushed inflation even further. Low interest rates during and toward the end of the pandemic in combination with pent up consumer demand resulted in increased spending within the household sector, adding to the supply side inflation. With retail sales continuing to grow and strong business conditions, the RBA’s need to implement contractionary monetary policy became clear.
“That’s why they’re raising interest rates, they know they can’t get the lettuce price back down … but they can do something about strong demand and that is what they’re trying to slow down,” added Oliver.
2. This is the first real dose of inflation we’ve had in 20 years
Warnes sees inflation as a natural part of the business cycle as the economy expands and contracts. He believes the anxiety in the market exists today because Australia hasn’t experienced inflation like this in the last 20 years.
“The markets aren’t too comfortable with [the current levels of inflation] because they haven’t seen inflation of that dimension.”
The 10-year yield curve is used to grasp the markets long term expectations about the economy. Warnes uses the 10-year US Treasury yield curve from the early 2000s and 2008 as comparable examples to the current period. He demonstrates that in periods where there is higher inflation, the long-term expectations for positive economic growth falls.
3. Cost-push inflation is more dangerous than demand-pull inflation
In his session Warnes mentioned that there are two different types of inflation: cost-push inflation and demand-pull inflation.
Cost-push inflation happens when the price of inputs increases, such as wages and raw materials. When the inputs become more expensive the costs that the supplies face is passed on to the consumer through the price of the good or service. The higher costs of production may also result in a reduction of supply.
On the other hand, demand pull-inflation occurs when more consumers want to purchase the same good or service. Growing consumer demand can cause the good or service to become scarce. This results in a higher price as many hands are chasing a limited amount of supply.
Warnes believes that cost-push inflation poses a bigger threat as the RBA does not have control over the cost of labour or raw materials.
“The central banks can take control of demand; they can put rates up to dampen or choke demand off and that brings demand and supply back into equilibrium. They have no control over supply side,” says Warnes.
“The cost push is coming from wages and the wages catch up is much more difficult to control and that is not driven by interest rates,” he added.
What we are watching:
- Tuesday: RBA Bullock Speech, Westpac leading index
- Wednesday: Great Britain inflation rate
- Thursday: Australian unemployment rate
- Friday: Great Britain retail sales data
