Inflation genie out of the bottle

 
Despite favourable trading conditions, the rate is rising - and don't hold your breath waiting for it to be squeezed back.
WOULDN'T you know, everything is going up except share prices.
Inflation is rising everywhere, most ominously in China, so there's no way we were going to be spared.
But the worry in the annualised, underlying rate creeping outside the Reserve Bank's comfort zone is that it was despite a retail recession and a strong dollar bearing down on import prices.

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That's not good - the inflation genie is out of the bottle. And don't fall for the three wishes trick, either.
Unless the Reserve Bank is willing to lift interest rates three or four times in rapid, confidence-sapping succession, which I doubt, the only hope of squeezing it back would be an even higher dollar.
That would require the US dollar to sink even further and China to keep growing at the same elevated rate forever.
There are too many vested interests - think every other country that doesn't want its own currency going too high - to allow the US dollar to drop much more.
Thankfully, where it's been hanging around has done wonders for Wall Street, which, all things considered, has been remarkably sanguine about the world's sovereign debt issues, especially its own.
After all, the Dow is dominated by multinationals that are raking it in, thanks to the weak US dollar.
The profit surge on Wall Street, the global bellwether, makes our sharemarket safer than it looks, if you go about it sensibly.
As inflation rises, savings accounts, term deposits or bonds become riskier. Notice how their interest rates have been stable or falling while inflation has been rising.
But the returns on dividends have been going up - not that you would have noticed, what with having to keep up with the latest debt crisis and all.
The average yield from the biggest 200 stocks is almost 6 per cent, after taking the 30 per cent tax credit from franking into account.
Sure, you can also get that on an online bank deposit but not after tax. And it's a waste of time staying cashed-up waiting for a sensational term-deposit rate to come along. That won't happen when nobody is borrowing, so the banks don't need to raise more money.
Still, at least you know you'll get your money back with a bank deposit. Well, yes and no. After tax and inflation, there won't be much left.
A blue-chip stock will grow, though it doesn't pay to be picky about exactly when.
Amazingly, the best-paying stocks have done worse than the overall market despite, in most cases, increasing their dividends.
Telstra, I hate to say, comes to mind.
The fact is it has a dividend to die for - and its shareholders have waited so long for the price to recover, some might have died.
Yet, at $3, the yield on Telstra shares is 9.3 per cent from its 28¢ dividend, which is not under any threat. With franking, it jumps to 13 per cent. Even if the share price dropped 10 per cent, or 30¢ - we're talking Telstra, so best to be realistic - you'd still be ahead of a term deposit.
The banks are better still. They've been marked down so far it's more likely their share price will rise than fall over, say, the next year.
And while you're waiting, they're yielding almost 10 per cent after franking credits.
Read more: http://www.theage.com.au/money/investing/inflation-genie-out-of-the-bottle-20110730-1i5e2.html#ixzz1TkcxWqtx