Despite a recent sharp fall in inflation rates, unprecedented monetary stimulus still poses a threat. Inflation-proofed strategies continue to represent an attractive investment.
Don’t underestimate inflation-proof strategies
The unprecedented easing of global monetary policy following the financial crisis of 2008 led to predictions of rampant inflation. Today, it’s quite the opposite. Low rates persist in the US, UK and Europe, not to mention Japan and even China. While we do not envisage a rapid pick up in prices in the near future, suggestions that inflation has been laid to rest look equally misguided.
Dormant, not dead and buried
Dormant is probably the right word. Much of the drop can be explained by a plunge in the price of oil and other raw materials, and the influence of this will start to wane. It is true that plenty of other factors have contributed to keeping inflation in check – and they won't disappear overnight. Households look likely to keep reducing debt, for example. And the ongoing liberalization of global trade will continue to exert downward pressure on prices.
Be wary of bold predictions
But we should be wary of claims of an end to economic relationships that have held for centuries. In the 1990s there was a widespread belief in the ‘Great Moderation’ – a permanent reduction in the volatility of economic cycles. Towards the end of the same decade, the head of the US central bank suggested the internet had helped to create a ‘new paradigm’. The stock market crash of 2000 and the recession of 2008 put an end to those theories.
An ever-present threat
We don’t anticipate a dramatic pick-up in inflation just yet. Nevertheless, it is important to recognize the dangers posed by the unprecedented monetary stimulus of recent years. If central banks were to respond too slowly to an improving global economy prices would quickly rise. Investment products designed to offer a respectable return in a low-inflation environment will come into their own should inflation unexpectedly rise, and make a useful addition to any portfolio.
Past performance is no guarantee of future results. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.