Australia’s CPI hits a 20-year high. What next for JB HiFi shares?

Usually, when inflation rises, it’s because the economy is ‘overheating’ – growing at an unsustainable rate – and the central bank raises interest rates to cool it down.

This time, however, the inflation appears to be largely structural and raising interest rates may only result in slowing the economy.

Moreover, there may be more price inflation to come. This could have a significant impact on consumer spending.

Inflation hits the basics – food and household items

When the prices of wine and taxis go up, people drink less and walk more. But when the price of food rises, people still have to eat.

In the last 12 months, prices of bread and cereal products, meat and seafoods, and fruit and vegetables rose by more than 6%. The prices of non-durable household products rose 10.5% over the same period.

The largest rise was, unsurprisingly, transport costs. Higher oil and natural gas prices pushed transport costs up 13.1%.

This may be just the beginning.

There may be more inflation on the way

These inflation figures don’t include the 18% increase in electricity prices in July. Nor does it come close to capturing the 509-1,087% rise in wholesale electricity prices, which electricity retailers will likely pass on to consumers.

Globally, however, there are hints of future shortages. Shortages usually result in higher prices.

Beef prices may soar a few months from now. US ranchers are selling their herds in unprecedented numbers as the ongoing drought reduces the profitability of beef farming. The higher slaughter numbers will keep beef prices lower in the short term, but once the cattle have been slaughtered, the smaller herd sizes could impact global beef prices.

Grains and internationally traded staples may rise further if Sri Lanka’s farm output continues to deteriorate.

Corn and wheat prices – already pushed higher from the war in Ukraine – may rise further if Ukrainian exports are disrupted.

Fertiliser prices may face more pressure, resulting in lower usage and crop yields. In addition to the reduction in Russian exports due to sanctions and the war, the cost of producing ammonia and urea (used for creating nitrogen-based fertilizers) has risen with the price of natural gas. To top this off, German chemical giant BASF announced on July 27, ‘We are reducing production at facilities that require large volumes of natural gas, such as ammonia plants."

As with oil, these commodities are global and will likely affect Australia.

Consumer spending will likely contract

High inflation without corresponding wage increases leads to either lower consumer spending, lower savings rates, or both.

As interest rates rise, saving money is now more attractive, so those who can afford to will likely attempt to save more. However, those living paycheck to paycheck won’t have a choice – they’ll have to spend less on discretionary items to buy food.

Qantas could be one of the biggest losers from lower consumer spending

Australia’s largest airline is already reeling from higher oil prices, staff shortages, and two years of lost revenue.

Now that consumers are flying again, Qantas Airways Ltd can’t meet demand. In June 2022, Qantas had a domestic industry-leading cancellation rate of 8.1%.

JB HiFi ould also be a big loser

JB Hi-Fi Ltd is a specialty retailer of home consumer products with a particular focus on consumer electronics, software, white goods and appliances – consumer goods that people don’t need as much as food, shelter, and clothing.

Over the past several years of almost zero interest rates, JB HiFi has been a great investment. It paid regular dividends, increasing yearly from 66c in 2013 to $2.70 in 2020 and 2021.

JB HiFi was one of the Covid lockdown winners. People locked in their homes tended to spend more on their homes, and JB’s sales rose by 11.5% in 2020 and 12.6% in 2021.

This propelled earnings per share to more than double, from 217c in 2019 to 440c in 2021.

The share price soared from $10.22 in 2013 to $44.84 on 10 August 2022.

Is this sustainable? Now that people are returning to work and inflation is eating into peoples’ pay cheques, JB HiFi may struggle to maintain these profits and dividends.

Right now, the dividend yield is 6.1%. This was a good yield with bank deposit rates at just 1.2%. However, it looks less attractive compared to deposit rates as high as 4.3% currently being offered for term deposits.

If the above analysis and assumptions are correct, and JB lowers dividends to 2013 levels, the share price could head back in that direction too.

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