There’s a fair amount of talk in the financial press at the moment about rising inflation, but we don't pay much attention to sensationalised news reports.
There’s a fair amount of talk in the financial press at the moment about rising inflation. As I type, the UK press are attempting to whip up a storm with headlines reporting the highest levels of inflation in a decade off the back soaring food costs
We don’t pay much attention to news reports as they’re usually written with a dollop of sensationalism and we’re not in the business of selling column inches – we’re in the business of growing our clients’ wealth over the long-term. So, perhaps now is the perfect time to take a measured look at what’s actually happening with inflation, and whether investors should be doing something about it.
Has inflation been rising?
In a word, yes. The most recent figures (August 2021) from the Organisation for Economic Co-operation and Development (OECD) reports the annual growth rate of global inflation at 4.2%, up from 1.2% in the prior 12 months. In the USA the figure is even higher at 5.4%. Before you begin to worry about inflation spiralling out of control though, a little bit of context is needed.
For one, the figures are much lower in places like the EU (2.5%), the UK (2.1%), China (1.0%) and Japan (-0.3%). Global inflation has also been rising from a low base. It had fallen to almost nothing last year as economies ground to a halt due to the crippling impact of worldwide lockdowns.
Enter the biggest government spending spree since World War II. To keep economies afloat, governments around the world pumped trillions into them. Whenever there’s a big increase in the money supply, the demand to spend it can outstrip the supply of things to spend it on. When that happens, prices are pushed up and you get inflation.
Many would argue inflation was therefore inevitable. Rising from a low base though can make it appear worse than it really is. Some believe the price rises this year are simply inflation that would normally have played out in 2020, but instead has been pushed back into 2021 due to all the economic distortions.
Will inflation keep rising?
The 10-year Breakeven Inflation Rate, which represents market inflation expectations over the next decade, is currently around 2.4%. That’s also where the OECD expects global inflation to be this time next year. That’s slightly higher than the long-term 2% figure many governments target, but it’s a far cry from what you would call skyrocketing. Back in 2008 global inflation stood at 3.8%, in 2000 it was 4.1%, 1990 was 7.1% and in 1980 it was an eyewatering 14.8%.
Remember the Breakeven Inflation Rate and OECD figures are just predictions, and expectations can change in either direction. For now though the market doesn’t seem to be giving much indication about inflation getting out of hand. The US Federal Reserve has also stated it expects current levels of rising inflation to be “transitory”.
Of course market and central bank forecasts could turn out be wrong – they often are. Whether or not inflation keeps picking up or slows back to levels on par with recent years though, one thing’s almost certain – inflation will nearly always be with us.
Should you care about inflation?
Inflation erodes wealth. Money now will be worth less in the future as it’ll buy fewer things as prices rise. A little bit of inflation may not seem like much, but over time its compounding effect can have big consequences. Even with 2% inflation, left unchecked your wealth drops by nearly 20% after 10 years, and is almost cut in half after 30 years.
Impact of inflation on £/$/€ 10,000
So although it’s uncertain whether inflation will keep rising or not, any inflation will hold back your spending power in the future. Therefore if you care about having enough income to live the retirement you want, or make sure those savings for your children keep pace with rising education and housing costs, inflation is something you need to plan for.
What can you do about inflation?
Although rising prices are usually an unavoidable part of the world we live in, there is something you can do to protect your wealth from being eroded by inflation – grow it. By growing your wealth you can not only stay ahead of inflation, but potentially increase your purchasing power for future years.
That’s where Skybound Wealth comes in.
We invest the wealth you entrust to us in portfolios that aim to deliver not only inflation-beating returns, but also market-beating performance too. Although the future of inflation, the economy and markets is unpredictable – as it has been and always will be – our portfolios invest in things that have stood the test of time. Whether inflation goes up, down or sideways you’ll be invested according to what’s most important – helping you achieve your financial goals.
Head of Investments
Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.
Investing involves risk including the loss of principal. No guarantees of investment performance are offered. Your account values will fluctuate and there will be periods involving negative returns. Investing requires a long term time horizon.
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