Inflation!
This week's Australian Federal Budget proved to be a highly stimulatory affair, largely as expected.
James Foster ran through the key points here, with there being relatively few surprises in the end.
This rather suggests that the boomtime conditions and confidence for Australian business will most likely continue through until the next election.
It's not really clear at this point what Labor can propose to differentiate themselves or capture the imagination of the electorate.
Albanese did suggest the construction of 20,000 affordable homes over 4 years, but this is only a small measure to address a giant issue.
The other main news of interest this week concerned U.S. inflation, which came in far higher than market expectations in April, at 4.2 per cent over the year (or 3 per cent for the core measure).
And here's the graph, also via James Foster, showing the spike:
What next?
There are a couple of key schools of thought here.
One is that - yikes! - here comes some serious inflation at last, with President Biden tipping unprecedented trillions in stimulus into a powerful reopening U.S. economy which doesn't need it.
If this scenario plays out and interest rates start rising quickly there's an almighty shitstorm in the post for U.S. stocks, following a blistering decade.
Charlie Bilello with one measure of valuations (though they're pretty much all in bad nick):
European and emerging markets valuations are significantly lower, suggesting that a level of diversification might be a smart play.
The alternative and perhaps predominant view is that there's a base effect at play, and much of the inflation is caused by temporary or transitory factors which will ebb away as normality returns.
For sure if you look at longer term measures and financial markets, expectations for inflation remain fairly modest.
Indeed, some commentators even think that heavy deflationary forces are still at play, and will reassert themselves sooner or later.
Australia only reports inflation quarterly, and we're coming off inflation tracking at around record lows in the March quarter, so there's little risk of a major overshoot any time soon.
In fact, inflation has been running below target since 2014!
But here too there are some nascent signs of inflation in rents, materials, construction trades, with skills shortages also likely to emerge in some lower paid sectors, such as hospitality.
Markets are largely unperturbed at this stage, except maybe for the more speculative end of tech stock town, but it's one to watch over the year ahead.
