09-06-2020

The roller-coaster of inflation

None of us know what the future might hold as we come out of lockdown, but we can try and make predictions. I don’t have a crystal ball, but I do study what is happening in the financial world and I have one prediction that may surprise you…..

Most people expect inflation to remain low and fall to negative figures over the coming months. But fast forward beyond that and I predict inflation will start to rocket and we would all do very well to prepare for this. Let me explain why.

Government's globally are printing money, providing grants, furlough pay and all sorts of stimulus packages to try and boost the economy in the post Covid-19 environment. What we can be quite sure of is that we are going into a recession, which central banks are predicting will be the worst since World War II. It is going to get tough. More businesses are going to go under and we will see more Government support and bailouts. There will be a recession and a big one at that. 

When there is not enough money circulating, initially we see inflation drop. Currently, inflation as measured by CPI is 0.8%, reducing from 1.5% in March. We are expecting a further fall for May when the figures are published in June and we can potentially see this falling further and even dropping into negative figures in months to come.

Negative inflation essentially means the prices of goods and services is going down – this is called ‘deflation’.  Now that may sound like music to our ears, as I am sure we have all felt the increase to the price of our shopping basket over the last few months, but governments and central banks are fearful of deflation.

To put it simply, if you are looking at buying a car, house, a television or even a loaf of bread, why would you buy it today if you know it will be cheaper next month?  Deflation has a spiralling effect of killing an economy and governments and central banks will do everything possible to fight this. This will mean introducing measures to artificially stimulate economies to keep inflation bubbling away, even at a low level, until we curve out of a recession. There will no doubt be cuts to interest rates further to negative to encourage people to spend more. 

All of the borrowing and increasing debt governments around the world have had to take on to cover the costs of Covid-19, is going to have to be repaid somehow. This will mean increasing the tax take, but that alone is unlikely going to foot the bill.  If they can’t repay, the only other option is to ‘devalue’ the debt and how do you ‘devalue’ debt?  You got it… Inflation!

It is at this point I believe inflation will begin to climb. 

For investors, this means potentially having to start to position your portfolio for inflation.  Consideration could be given to incorporating inflation hedged investments and assets for the long-term, such as index linked bonds, property and commodities. We will of course continue to monitor the portfolios of our clients, working with investment managers and making changes as necessary.

That being said, the above only dips a toe in what is to come. We are all aware of the issues out there.  Right now it is about supporting each other, working to get the right outcome so that we emerge from this pandemic standing.

Please contact us if you have concerns about your finances. Banner Jones Wealth Management offer a free initial consultation where we seek to assess your situation and identify any areas where we can help.