I’m really excited for you to read Adam’s 2-minute piece in today’s newsletter - he’s taken one of your hairiest inflation questions and tackled it head-on. To tell you the truth, even though this isn’t my first RBA rate-rise working in the newsroom, I still find the WHY behind inflation tricky to fully grasp.

Never fear, Adam is here.

The quote: “It’s quite terrible to have everybody have a bunch of the world’s limited supply of DRAM sitting in their own computer and being used 5% of the time.”
OpenAI CEO Sam Altman made the comments on Stripe co-founder John Collison’s podcast, Cheeky Pint. Dynamic Random-Access Memory (DRAM) is a key component used in laptops and computers. A global shortage has emerged as demand from data centres grows, and Altman suggested more of that supply should go to data centres rather than sitting largely unused in personal computers.

The stat: 8.1%. How much home prices in Australia’s capital cities have fallen in the past seven months, according to the property research firm Cotality. That’s the fastest fall in home prices in the past 40 years, driven by higher interest rates, higher cost-of-living pressures, and weaker buyer confidence.

The graph:

The ASX 200 tracks the 200 largest companies listed on the Australian share market. In the past month, the ASX 200 has risen by 2.3%. The banking sector led the gains, along with health care and industrial companies. Mining companies fell as commodity prices weakened. The Reserve Bank of Australia raised interest rates to 4.85% yesterday, as most investors expected.

AI is inevitable.

You might’ve heard tech leaders repeat this, or something similar, over the past few years. For a while, investors seemed to agree, pouring billions into companies developing AI and the infrastructure to power it.

But last week, some of the world’s biggest tech companies, including Alphabet and Amazon, released their earnings. Despite reporting strong growth, several saw their share prices fall.

Investors are now increasingly questioning whether the billions being poured into AI will pay off and how long it will take to see a return.

Here’s what has been happening.

In the U.S., publicly listed companies typically report their financial results every three months. These reports, known as earnings, include how much money a company brings in (revenue) and how much profit it makes.

Alphabet, the company that owns Google, reported its cloud computing revenue grew 103% to $US30.7 billion ($AU43.9 billion) in the three months to September. The company recorded a net profit of $US26.2 billion ($AU37.5 billion).

However, its overall revenue and earnings fell short of analysts’ expectations. Its shares fell 12.6% last Thursday, marking their biggest one-day drop in more than 20 years.

Amazon’s cloud computing business, Amazon Web Services (AWS), grew 39% to $US46 billion ($AU65.8 billion), its fastest growth in nearly five years.

But Amazon also missed analysts’ expectations, with its shares initially falling more than 6% before closing 1.4% lower on Friday.

The same story played out across the industry. The Nasdaq 100, an index tracking the largest non-financial companies listed on the Nasdaq stock exchange, fell 3.5% on Friday.

A company’s share price is influenced by how much money investors expect it to make in the future. That’s why a company can make a bucketload of money but still see its share price fall – investors might’ve expected two bucketloads.

But there’s more to the story than just “investors expected more money”. They’re also concerned about another financial measure: capital expenditure.

Capital expenditure is money a company spends on long-term assets. For tech companies, that includes building data centres and buying computer chips needed to power AI.

Alphabet spent $US51.4 billion ($AU73.5 billion) on capital expenditure in the three months to September, more than double what it spent in the same period last year. Amazon spent $US77.3 billion ($AU110.5 billion).

Other major tech companies, including Meta and Oracle, are also spending heavily on AI infrastructure. In their latest reported quarters, all four companies spent more on capital expenditure than they generated in operating cash.

The concern is that these companies are committing enormous amounts of money before knowing how much they’ll earn back from AI. Investors are questioning how long it will take to recoup those costs – and whether the eventual returns will justify the spending.

A bubble happens when an asset's price rises well above what it’s actually worth, often fuelled by hype and speculation, before eventually falling sharply.

Some investors believe AI is showing signs of a bubble. Ken Griffin, founder of hedge fund Citadel, said investors are “almost certainly” in one. He pointed to uncertainty over whether companies will make enough money from AI to justify their enormous spending.

Others argue the demand for AI is real.

Wall Street strategist Dan Greenhaus said results from AI chip suppliers show demand remains robust, and Amazon has $US578 billion worth of cloud contracts signed but not yet delivered.

Ultimately, bubbles are usually only recognised with certainty in hindsight. One disappointing earnings season doesn’t prove an AI bubble has burst, or that one exists in the first place.

Reporting by Adam Wan.

A question I keep seeing in the comments section of our Instagram posts is: “Why doesn’t the Government just cut back on its spending to bring inflation down?”

It’s a fair question, and one that gets to the heart of an ongoing economic debate.

Some economists and Government critics argue that cutting public spending would help bring inflation down. But the Government, backed by other economists, says its spending isn’t the main driver of inflation right now.

Let’s unpack what’s going on.

Last week, the Australian Bureau of Statistics reported inflation at 4.3%, up for the second straight month.

Yesterday, the Reserve Bank of Australia (RBA) raised the cash rate to 4.85%, the highest it’s been in 18 years. The RBA lifts rates to cool spending and bring inflation back to its 2-3% target.

Inflation is the general increase in prices in an economy. One way inflation can increase is when too much spending occurs relative to the goods and services available.

Imagine a hamburger shop that is getting more customers than it can serve. A natural response is to increase its prices. Sure, it might lose some customers but it’s already at capacity, so it doesn’t mind. Now imagine this playing out in millions of shops around the country, and you’ve got an economy with rising inflation.

So, if we can get people to spend less, we can reduce inflation.

In economics, spending can be broken down into public spending (spending by the government) and private spending (spending by individuals and businesses).

Supporters of spending cuts say that the Government needs to play its part in bringing inflation back down to the RBA’s target. Lower public spending would lower overall demand, helping to ease pressure on prices.

Many on social media (who make up private spending) have questioned why households are being asked to rein in their spending while the Government continues to spend billions of dollars.

There is also data to back up their frustration.

According to EY, government spending on services and infrastructure makes up 28.9% of the economy, which is well above its pre-COVID average of just under 23%.

The IMF has also said the Government could help the RBA bring inflation down by reining in spending.

While government spending adds to total demand in the economy, the Government argues it isn’t the main thing driving inflation right now.

RBA Governor Michele Bullock has also said it’s “not the sole cause” of inflation. In the RBA’s statements announcing this year’s five rate rises, the RBA has pointed to stronger-than-expected private demand, high oil prices, and businesses struggling to keep up with demand, rather than government spending.

Data from the Australian Bureau of Statistics also shows government spending on services and infrastructure grew by about 2% to June, adding 0.1 percentage points to economic growth in the June quarter. In other words, while government spending makes up a relatively large share of the economy, it hasn’t been growing particularly quickly.

Others also argue that even if the Government wanted to cut spending significantly, it’s harder than it sounds.

The NDIS, often singled out by critics, is set to be cut by $37.8 billion over four years. The Grattan Institute argued that closing the budget deficit through spending cuts alone would require spending cuts five times the size of the NDIS savings, meaning cuts to health, aged care and pensions.

The Government will release the Mid-Year Economic and Fiscal Outlook (MYEFO), which is an update to the annual budget, in December.

Finance Minister Katy Gallagher and Treasurer Jim Chalmers both recently said the Government is working on savings in MYEFO, but neither committed to more savings than new spending while cabinet is still deciding what to cut and what to fund.

Reporting by Adam Wan.

Interest rates just hit an 18-year high. What now?

The Reserve Bank has lifted the cash rate from 4.60% to 4.85%, the highest it’s been since 2008. It’s the fifth rise this year, and the move CommBank economists had been expecting.

The RBA says inflation is taking longer to come down than it thought, and now isn’t expected to fall back to 3% until late 2027.

CommBank’s Head of Australian Economics, Belinda Allen, breaks down what the decision means for the economy, property prices and where rates could head next.

Samsung has taken a cheeky swipe at Apple’s first foldable iPhone, using reports of cracks appearing along the device’s screen to poke fun at its biggest rival.

In Canada, Samsung has reportedly hired mobile billboard vehicles displaying the message “Folding is nothing new to us” alongside an image of a cracked phone.

The stunt comes as some iPhone Duo users report cracks forming along the fold of the inner screen, giving Samsung a chance to remind customers it has been making foldable phones for years.