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Inflation Worries?

It’s the topic du jour with economists. So we thought it helpful to briefly recap what has led to inflation being the topic on everyone’s lips: when the pandemic took hold in March last year and global lockdowns were put in place, the world economy fell dramatically. Global recession followed with economic contractions not seen since the Great Depression. However, within about 9 months covid-19 vaccines were developed, monetary and fiscal support measures were dished out and a v-shaped recovery blossomed. At the time of writing, many world stock markets are close to or at new all-time peaks.

It seems too good to be true, so many economists are worried about what comes next, fearing a repeat of the Great Inflation that occurred between 1965 – 1982 when interest rates hit highs of 20% and CPI was around 11%.

Will all the monetary support (that is ultra-low interest rates and quantitative easing) and fiscal support (JobSeeker, JobKeeper and all the other grants and payments) combine with supply issues (logistics bottlenecks, spikes in commodity prices, supply chain disruptions, pent up demand for certain products) and create a new wave of inflation?

In Australia RBA Governor, Phillip Lowe and his US counterpart Federal Reserve Chairman Jerome Powell both believe price pressures to be “transitory” as economies rebound. They believe policy needs to be accommodating to assist recovery in wage growth and employment.

It is all about getting back to normality. Economists appear to sit in 2 camps, the glass half full and the glass half empty: rising rates reflect a stronger economy, a more normal environment in which stimulus measures are no longer needed. Or rising rates mean the end of global liquidity, risk assets are over-valued and that we are heading back into uncertain times.

The Federal Reserve recently announced its intention to bring forward its first rate hike expectations. Markets reacted briefly to this however it is still possibly at least 2 years away so the noise died down fairly quickly. In the coming months and years, inflation will push higher by virtue of a very low base, however, it is difficult to see that it will be the start of structurally higher inflation anytime before 2024-25. The timing of tapering will be something to keep an eye on.

It’s important to note that whilst valuations look expensive on an absolute basis, it is actually less so relative to the low-interest rates eg. Using a much lower discount rate to future cash flows.

Inflation is likely to remain a discussion point for some time, if you have concerns about your portfolio please get in touch.

This information contained in this document has been provided as general advice only. The contents of this document have been prepared without taking account of your personal objectives, financial situation or needs. You should, before making any decision regarding any information, strategies or products mentioned in this document, consult with your GPS Wealth Ltd financial adviser to consider whether it is appropriate having regard to your own objectives, financial situation and needs

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