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 MARKET REPORTS |
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Analyst report - shares
When is 'core' not so core?
July 14, 2007
Brendon Lau, ShareAnalysis
We are often told by economists to focus only on the core inflation reading and discount volatile energy and food prices, as these tend to be cyclical and overly impacted by one-off events (remember bananas?). However, ignore these volatile items for too long and you could be in for a nasty surprise.
Although agriculture and energy prices do fluctuate a fair bit, the overall trend over the past two years is up. In some cases, the price appreciation has been substantial in US dollar terms. Crude oil and corn are two good examples. Since January 2005, oil has jumped 63.3% while corn price has almost doubled. While these commodities have not made much of an impact on inflation so far, they do feed into a wide-ranging variety of products and industries.
Higher oil prices not only affect transportation costs but also the cost of plastics, packaging and other chemical products. Corn is used in food and flavouring, animal feed and of course bio fuels. In fact, the latter is the primary reason why corn has soared. Not that long ago, traders did not think energy and corn prices were related. As mentioned, growing environmental consciousness is also pressuring prices, and energy and corn are likely to make further price gains.
As corn prices surged, farmers have neglected other crops. Partly due to a drop in supply, the price of oats is up 68.4%, rough rice 53.7%, soybean 55.3% and wheat a whopping 87%. If you had a nagging feeling you were paying more at the supermarket checkout, you could be right. Fortunately, the price of meat has been better behaved, at least for now. Furthermore, the strong Australian dollar is acting as a counterbalance by helping lower the costs of imported goods.
The CPI reading (excluding volatile items) since December 2002 has been well within what is believed to be the Reserve Bank of Australia’s (RBA's) comfort zone of 2%-3%. If you included volatile items, the picture is more convoluted. So before you rush out to grab your next loan, remember RBA Governor Glenn Stevens’ comment on the weakening factors holding back inflation.
One such factor is the cheap Chinese and Indian labour force. Workers in these countries are starting to demand a fairer share of the economic pie and, as a consequence, wage pressures have been building. The total wage bill in China has increased an average of 10.6% a year since 1999, while pay increases in India are running about 14%. This trend is unlikely to change anytime soon. Considering all these factors, you should not be surprised if interest rates rise over the coming months. Such is the price for social and environmental justice.
Brendon Lau is the Editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. For more information on these stocks and for a free trial of its web-based investor research services, please go to the ShareAnalysis website.
More articles from this week's CompareShares newsletter:
ANZ: will the new CEO sing in tune?
Companies to benefit from the rise of the grey nomads
What is the ideal mix of companies?
Trading: is your bargain stock a lemon?
Investing in a toppy market
Are investment clubs good for your wealth?
Stock of the week: TPI
CFDs: the best time to trade
Analyst report: gold bull seasonals
Investing: Paying the cost of confidence
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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