What is Inflation and how does it impact retail stocks?

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What is Inflation and how does it impact retail stocks?

 What is Inflation and how does it  impact retail stocks?
Image source: © Moth | Megapixl.com

Highlights

  • The global markets for food and energy have been severely disrupted by the conflict between Russia and Ukraine, imposing a direct impact on CPI inflation in every country.
  • In Australia, CPI increased 1.8% in June quarter and 6.1% over the twelve months to the June 2022 quarter.
  • Endeavour Group and Coles Group are two food stocks that are green on a YTD basis.

It is well known to everyone that the cost of living is increasing across the globe as prices of food, living and other non-staples have jumped due to the rising inflation rate.

What is inflation?

Inflation determines how much more expensive a set of goods and services has become over a certain period.

Consumer Price Index (CPI) is a well-known indicator of inflation as it measures t the percentage change in prices of goods and services which are used by households.

Inflation gives rise to persistent changes when businesses pass on cost increases to their customers to compensate for them.

According to the Australian Bureau of Statistics, CPI went up  1.8% in  June quarter and 6.1% over the twelve months to June 2022 quarter. The most significant hikes in price were 7% in furniture, 4.2% in automotive fuel, and 5.6% in new dwelling purchases by owner-occupiers.

% Change in CPI from June 2021 quarter to June 2022 quarter

  • Food and alcoholic beverages - 9
  • Clothing and footwear - 1.6
  • Housing - 9
  • Furnishings, household equipment and services - 6.3
  • Health - 2.4
  • Transport - 13.1
  • Education - 4.7

Housing
Since the series' inception in the June 1999 quarter, new home prices recorded their highest annual hike. The price is increasing mainly due to an increase in building construction activity and the ongoing shortage of labour and material.

The construction grants which are paid by the government were also less this quarter than the previous quarter.

Prices for new homes continued to grow because of labour and material shortages, high freight costs, and continuously high levels of construction activity.

Automotive fuel prices continue to rise

Prices of automotive fuel increased  for the eight successive quarter. The Russian invasion of Ukraine further increased the price pressure, whereas the easing of COVID-19 restrictions strengthened global demand. These resulted in a 4.2% increment in automotive fuel price.

Fuel prices went down in April (-13.8%) following the reduction in fuel excise but jumped again in May (+11.1%) and June (+6.8%).

RBA governor Philip Lowe has outlined three factors which are driving higher inflation:

Worldwide disruption of supply chain

As consumers moved their spending from services to commodities during the pandemic, global supply networks were disrupted, along with a rise in demand for goods. Due to the length of global supply networks, any disruption anywhere along the chain impacts the entire chain. The ensuing disruptions have raised business costs and limited their capacity to adapt to the shift in spending patterns. As a result, items are now more expensive on international marketplaces.

Russia's invasion of Ukraine

The conflict between Russia and Ukraine has badly affected the markets for food and energy across the globe. This has a direct impact on CPI inflation in every country. There is no denying the fact that increase in energy prices directly impact the transportation and manufacturing expenses.

Increment in demand

The third factor behind inflation is believed to be the unexpected surge in demand. Quick recovery in household spending implied the success of vaccination campaigns and the exceptional financial support from different policies. The improvement in health situation helped the households to regain the confidence and the ability to spend. This resulted in robust growth in average demand and the advent of tight labour markets in many countries contributing to the higher inflation rate we are seeing now.

In this article, we at 2022 Kalkine Media® will discuss two ASX-listed stocks that have provided positive price returns on a year-to-date (YTD) basis.

Endeavour Group Ltd (ASX:EDV)

Endeavour Group operates one of Australia's top retail drinks and hospitality businesses. Endeavour’s shares have provided nearly 22.7% price returns on a YTD basis.

In H1F22 results, Endeavour Group reported a 3.2% increment in group EBIT, 15.6% surge in NPAT and 16.0% increment in basic earnings per share (EPS).

Commenting on the results, the company's Managing Director and CEO, Steve Donohue, said, "Our first 6 months trading as an independent business has demonstrated the structural resilience of the group. This is a positive result during a period which was heavily impacted by COVID-19."

During the third quarter of FY22, the company's hotel trading improved with a 3.8% increment in sales.

Coles Group Ltd (ASX:COL)

Coles Group is one of the top retailers with over 2,500 retail outlets in Australia. It offers products from farmers and suppliers to its customers. The group operates more than 800 supermarkets. The company's share value has appreciated by about 7.6% on a YTD basis.

In the 2022 third-quarter sales results (12 weeks from 3 January 2022 to 27 March 2022), Coles Group reported a nearly 4% increment in gross retail sales. Similarly, the sales revenue of the group increased by 3.6%.

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