The June quarter inflation numbers were printed this week and as expected, it was not good!
The chart below depicts the current situation we find ourselves in thanks to COVID-19.
As you can see, the cost of living dropped an unprecedented (have we had enough of hearing that word lately?) 1.9% over the past three months to June resulting in the annual rate of inflation coming in at -0.3%.
Since 1949, this is only the third time inflation in Australia has been negative!
In a nutshell, this means people are not spending money. Since people aren’t, or more correctly, haven’t been able to spend money due to the restrictions brought on by COVID-19, company profits will be lower and if profits are lower so will dividends. As to what extent, we’ll find out in August.
A low inflation rate impacts interest rates and this is not good for term deposit holders. If inflation is low, so are interest rates to encourage spending. However, it’s just not happening. In these times return expectations from our investments need to be adjusted to align with the environment we are in, which is low-growth. This looks like remaining for some time and it is a global phenomenon.
To counter this in the United States, this is how they’re addressing the issue there:
For now, adjust your return expectations from your investments and strap yourselves in, there’s a long way to go!
Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.