ASX shares represented by the ASX 200 (ASX: XJO) and the All Ordinaries (ASX: XAO) are up after the Australian Bureau of Statistics (ABS) released the latest inflation data.
Overall CPI inflation rose by 0.7% in the December 2019 quarter, compared to the September 2019 quarter. The biggest contributors for the quarter were tobacco (up 8.4%), domestic holiday, travel and accommodation (up 7.3%), automotive fuel (up 4.4%), and fruit (up 6.8%).
However, there was also areas of deflation. The biggest deflation areas were international holiday, travel and accommodation (down 2.9%), garments for women (down 2.5%) and wine (down 1.6%). Seeing the wine price change is interesting timing considering what just happened with the Treasury Wine Estate Ltd's (ASX: TWE) update.
Over the past year overall inflation has been 1.8%, and this quarter's rise of 0.7% is an annualised 2.8%, though I wouldn't expect inflation near 3%, it's much more likely to be near 2%. The Reserve Bank of Australia's (RBA) target is for long-term annual inflation of 2% to 3%, so this quarter is just what the RBA is looking for.
Combined with the recent news of a lowering unemployment rate, it is now very unlikely that the RBA will cut interest rates in February.
Maybe some investors will be disappointed that lower interest rates won't push asset prices even higher, but that's a pretty short-term view. Interest rates are meant to be higher than today to properly reflect risks. Low interest rates make it harder for banks like Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) to maintain the same profitability.
The RBA can't really dictate what happens with prices in the supermarkets of Woolworths Group Ltd (ASX: WOW) or Coles Group Limited (ASX: COL). It can't control drought or food demand which affects Bega Cheese Ltd (ASX: BGA) or Costa Group Holdings Ltd (ASX: CGC). It can't stop the US almost going to war with Iran, causing petrol prices to go up from businesses like Viva Energy Group Ltd (ASX: VEA) or Caltex Australia Limited (ASX: CTX).
As a result of these numbers, it's quite possible that interest rates will stay at the same rate for the rest of the year.
