Inflation Rate Decreases, But Challenges Remain in 2024
After three years of pandemics, wars, and unpredictable markets, it’s exciting to be at the start of a new year full of opportunities in the stock market. That said, 2024 may still have some challenges, including lingering inflation. So, let’s review the latest inflation data to gauge what’s in store for the Australian economy in the first quarter of 2024.
Last Wednesday, Federal Treasurer Jim Chalmers announced that the inflation rate had fallen from 4.9% in October to 4.3% in November. While this is a notable difference, it doesn’t mean that the price of goods and services will fall, it just means that they’re not rising by as much as the previous month.
This is welcome news, especially for mortgage holders who are likely to see light at the end of the tunnel with the relentless interest rate hikes. That said, the figures show no reprieve for those renting, given that there was an increase of 8% to the cost of rent in the monthly CPI data for November.
Impact of Easing Inflation on the Australian Stock Market
Easing inflation is often viewed positively by the stock market because controlled inflation can indicate a growing and healthy economy. We want inflation as this increases investor confidence, but we don’t want it to be too high. As confidence increases, money starts to flow from fixed-income securities to the stock market, which is why I believe we will see a sustained rise in the market over the next year as the big end of town increases their participation. The more they increase their holdings, the more it drives the market, and the more retail investors get involved, and it snowballs.
Positive Effects of Lower Inflation on Consumer Sentiment
Positive consumer sentiment also increases with lower inflation as consumers feel more confident about their future purchasing ability. An increase in consumer spending is always a welcome sign for ASX-listed companies as it directly positively impacts their bottom line. As corporate earnings increase, so does the price of their shares.
Lower Inflation Boosts Profit Margins and Business Growth
With inflation falling, companies can also experience lower or more stable input costs, such as raw materials and labour, contributing to improved profit margins. The talk is that rates will not be cut until the second half of 2024, but companies will see this as positive. When borrowing costs are more attractive, companies are more willing to invest in business growth.
Currency Stability and Export Companies: Key Factors for Australian Stock Market
Finally, as Australia relies heavily on exports, currency stability is important for international trade. Lower inflation contributes to a more stable Aussie dollar, benefiting listed companies that engage in global trade. Some of the top companies in the ASX are big export miners such as BHP Group Ltd (LSE:BHP, ASX:BHP) and Rio Tinto Ltd (LSE:RIO, ASX:RIO, OTC:RTNTF), companies I anticipate will do quite well this year, which is why I’ll be keeping a close eye on the Australian share market, as it’s looking poised for a positive run.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au.
Analyst comment
Positive news: The inflation rate in Australia has decreased from 4.9% to 4.3% in November 2024. This improvement may lead to positive effects on the stock market, as controlled inflation indicates a healthy economy. Consumer sentiment and spending may increase, leading to higher corporate earnings and stock prices. Lower inflation can also boost profit margins and business growth for companies. Additionally, currency stability can benefit export companies, contributing to a positive run in the Australian share market. Analyst predicts sustained rise in the market.
