FOR WHAT IT’S WORTH … my view is that there is growing evidence to suggest inflation will not be as sticky as many pundits would have you believe.
Despite a recent surge in residential rentals, Australia’s inflation seems to have reached its peak and is expected to rapidly recede. And that’s evidenced by the June figures just out, showing that inflation has fallen from 7% to 6% per annum, over the last quarter.
Britain
Overseas, the UK has experienced a notable cooling in its inflation rate, which has dropped to its lowest level in over a year. This trend indicates that the increasingly high interest rates are potentially curbing the wage-price spiral, which has been a cause for concern.
Specifically, the Consumer Prices Index in the UK recorded an increase of 7.9% in June compared to the previous year, a significant decrease from the 8.7% recorded in May.
Additionally, core inflation has fallen from 7.1% to 6.9%, implying that the series of interest rate hikes, the most substantial in thirty years – effectively reining in soaring prices.
Consequently, this has led the pound to fall, and tempered investor expectations regarding further significant interest rate increases.
Canada & USA
Meanwhile, in Canada, inflation has slowed to a level within the control range set by its central bank for the first time since March 2021. Although progress in curbing underlying pressures has stagnated, the Consumer Price Index rose by 2.8% in June compared to the previous year.
Similarly, in the United States, inflation has experienced a considerable decline over the past six months, dropping from 9.1% a year ago to 3% in June.
This decline can be attributed to several factors, including lower commodity prices, improved supply chains, reduced transport costs, and easing demand. Both goods-price and services inflation have started to decline.
Looking ahead
Australia’s inflation is expected to follow a similar trajectory as the United States, albeit with a six-month lag.
Consequently, it is likely that the Reserve Bank of Australia is currently at, or close to, the peak of its interest rate cycle – with rate cuts potentially starting again in February of next year.
Historically, the 1970s have shown us that prolonged high inflation leads to the expectation that it will persist among businesses, workers, and consumers.
This expectation shapes their behaviour … influencing wage negotiations, price setting, and tolerance for price increases.
Fortunately, short-term inflation expectations (1-3 years) have significantly declined, and long-term expectations remain within a low range, as they have for the past three decades.
Bottom Line: The past couple of years have presented considerable challenges for commercial property investors.
However, there is now a glimmer of hope on the horizon, with interest rates poised to stabilise and potentially decrease once again in 2024.
While the road ahead may still be challenging until the end of this year, I’m optimistic there will be opportunities emerging in the market.
Best wishes …
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