Life in a low-inflation climate, carbon tax and all

Life in a low-inflation climate, carbon tax and all

If anyone was still listening to federal Labor, there could be a small voice somewhere saying “I told you so” over the first benign reading of the carbon tax's impact on inflation. Unfortunately for the government, the game has already moved on, while investors are increasingly thinking about life in a low inflation climate.

TD Securities monthly inflation measure for July incorporates a 14.9 per cent electricity price rise and a 10.3 per cent increase for other fuel prices – and still comes up with an overall headline gain of just 0.2 per cent for the month and 1.5 per cent for the year.

More importantly, TD's guess of “trimmed mean” inflation was negative 0.1 per cent for the month and just 1.4 per cent for the year. On that basis, we'd almost be fortunate to have the carbon tax impact to keep inflation out of the danger zone.

In any event, this very early reading suggests Treasury estimate of the carbon price having a 0.7 per cent impact on the CPI is not a problem. And therefore there's no strain at all for the RBA to keep its promise of ignoring the carbon price effect, just as it did the introduction of the GST.


Aside from some ACCC sabre rattling over the odd silly business talking up a carbon price impact, it seems Labor's hopes were well founded that the introduction of the tax would prove something of non-event after all the scare-mongering leading up to it. (And, seriously, just how dumb and/or politically motivated would a business be to even draw attention to a 10 or 20 cent price rise in a loaf of bread?)

But such is the state of the political divide that it doesn't seem to matter how low the impact might be. The July Westpac/Melbourne Institute consumer confidence survey showed an even greater blowout in the difference between coalition and ALP voters: an optimistic 124.1 for Labor voters and a very pessimistic 79.5 for coalition supporters – and there are considerably more of the latter than the former. The perception gap appears so large now as to be unbridgeable.

For investors, there is a bigger global game steadily playing out with the acceptance of a low inflation and subdued growth outlook. As demonstrated by a Greenwich Associates survey of Fidelity Worldwide Investment institutional investors, it's all about income first and possible capital appreciation second – the reverse of international institutional behavior over the past few decades.

Australia's franking credit system has ensured local investors didn't lose sight of the importance of dividends. As the game has turned out, chasing sustainable dividend streams has been the most successful strategy, but plenty of funds managers had been lured down the capital growth first path during the long bull market. According to the Fidelity study, the search for income has a lot further to run:

“Low interest rates and bond yields are encouraging a search for yield that forces investors – institutional, wholesale and retail - to look towards assets with more attractive risk-reward characteristics.

“The search for income – already a powerful investment theme - is set to grow in importance over the next decade and beyond.”

The study reports the asset classes being favoured by institutional investors over the next five years are Investment-grade bonds (both developed and emerging markets) and high-yield bonds, equity dividend income, and real estate strategies.