Despite a recent sharp fall in inflation rates, unprecedented monetary stimulus still poses a threat. Inflation-proofed funds continue to represent an attractive investment.
Don’t underestimate inflation-proof funds
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. But 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. For a start, much of the drop can be explained by a plunge in the price of oil and other raw materials. And while the influence of this will start to wane, plenty of other factors have contributed to keeping keeping inflation in check – and they won't disappear overnight. Households look likely to keep reducing debt, for example. And the ongoing liberalisation of global trade will continue to exert downward pressure on prices.
Be wary of bold predictions
We should be wary of claims of an end to the economic relationships that have held for centuries. In the 1990s there was a widespread belief in the permanently reduced volatility of the ‘Great Moderation’. Towards the end of the same decade, even 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 paid to those theories.
An ever-present threat
We don’t anticipate a dramatic pick-up in inflation just yet. Nevertheless, it is important to recognise the dangers posed by the unprecedented monetary stimulus of recent years. If central banks respond too slowly to an improving global economy, prices will 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.
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.