That old inflation thing again. It has fully reared its ugly ‘heads’ on numerous occasions and now we have talk of stagflation – when prices rise but growth slows. Trust me, it’s not a good idea, the consequences of which those who experienced the 70s will remember.
Inflation is well worth understanding because of the impact on your buying power in future years. This provides the motivation to ensure you have the very best investment management for your pensions/Isas/investments.
Remember back to an item in 1970 that cost £10? Today, with inflation that would cost £158.19. Every penny your money grew above £158.19 is buying power. If it didn’t beat inflation and some of the excessive charges I talked about last week, you can buy less with your money.
I remember a bag of crisps back in the 2p days – and there were more crisps than air in them too.
Stagflation could cause carnage
The 70s were a tough time, so threats of stagflation need to be considered as they completely erode your wealth. For example, £10 invested in 1980 as opposed to 1970 needed to be worth £43.85 today to have the same buying power as opposed to the £158.19.
Inflation is also a threat to your ability to pay a mortgage because the normal central bank policy is to increase interest rates to slow the economy. Some readers will remember the 17 per cent interest rate hike in 1979. How many remember the 300 year low we currently have of 0.1 per cent, is well below the average since 1975 of 9.4 per cent.
Rates like that would close the economy in a flash, with most unable to pay their loans. Carnage.
The OECD has now revised its predictions stating that inflation will soar significantly higher in 2021/22 than predicted. 1.5 per cent of this overheat of inflation is from higher shipping costs, bottlenecks and commodity prices such as energy. This is important.
Currently there are many people not returning to work. Ask anyone running hospitality. The furlough scheme also provided many with a large cash bonus as the UK savings ratio smashed through its all-time high. That, coupled with a lack of childcare and potential fear of a virus, means many have just not gone back to work and there may be a price to pay for them to be encouraged to do so.
If inflation retained stubborn, you have the ultimate issue of higher wage demands to pay for this and that, is a reverse tornado – implosion. Implosion, as this will fully filter through into the economy in terms of real inflation.
The most important issue now is that of education and conversation with the public to highlight what is actually happening with inflation and that it should be temporary.
There are currently over 850 mentions on the FT website for the word stagflation. It is gathering momentum and policy makers are very conscious of it.
Stagflation and its impact on you
The ‘nice’ scenario is that pandemic drops off in emerging countries where factory workers had been staying away. If this persists in emerging economies, the bottlenecks could and would create persistent inflation. You will pay more for a product if there are only two between 50 of you.
The IMF has stated they believe that inflation will calm to pre pandemic levels late in 2022 but central banks need to be ready to act (possible increase to rates) if inflation looked stubborn, or surprising on the upside, and that workers began to think higher inflation was here to stay. They did state that central banks should ignore the current drivers of inflation and look through that.
As governments push for 2030 sustainable goals targets, the cost of the action will redirect money and undoubtedly slow growth. This is sandwiched with colossal government debt squeezing the ability for central banks to raise rates which would hammer government borrowing costs, something they will just not want to do.
So it’s easy to see where stagflation is talked about. I’ve no crystal ball, but if you are tight on budgets and have a large mortgage, have a close look at what the costs might be with a shift in rates and also what current fixed rates are available.Inflation, Peter McGahan Last modified: October 25, 2021