The threat of persistent inflation has forced insurance companies and other businesses to warn of rising prices.
Insurers, building material companies, fast food outlets, and chicken farmers have been warning of price hikes these past few weeks as the economy rebounds, according to the Australian Financial Review (AFR).
Insurance Australia Group (IAG) chief executive Nick Hawkins recently described “inflationary pressures on claims costs” as a headwind to margins.
During the United Nations Climate Change Conference (COP26), IAG announced a profit downgrade due to several severe weather events in South Australia, Victoria, and Tasmania in late October. It also updated its net natural perils claims costs for FY22 by recording 14,000 claims following the devastating storms and anticipates that the net cost for this event could hit $169 million, the maximum retention for a first loss under the group's catastrophe program.
As a result, IAG increased its expectation for FY22 net natural perils claims costs to $1,045 million, a dramatic jump from the previous assumption of $765 million.
Peter Wilson, the chief executive of Reece, which produces plumbing fixtures, also shared to shareholders “inflation across most commodities” compounded risks from “labour shortages, rising inflation, supply challenges, and a lack of availability in skilled labour.”
The threat of price hikes comes as the lasting impacts from the pandemic shock drive inflation across the globe.
Although inflation indicates economic growth and supports the financial sector as interest rates rise, other sectors can suffer as inflation weakens the present value of future profits. Despite indicating economic growth and supporting the financial sector, inflation could impact other sectors by weakening the current value of their future profits.
As a result, fund managers who are still sceptical about the lasting impacts of inflation tweak their portfolios in case it persists.
“I'm on the fence,” said Steve Johnson, chief investment officer of Forager Funds, as reported by AFR. “We are buying some insurance in the form of commodities stocks and being careful about exposure to long-duration tech.”
