Markets and assets that work price increase When it’s more active, it may not be such a big investment.
- Long-term inflation expectations have risen by recent standards but remain at historically low levels
- That said, some assets that have been neglected are likely to reappear in the spotlight
- Anyway, these long-term predictions may be a little hopeful
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Inflation is back. After decades of obedience that some have declared dead forever, prices rise everywhere, crushing consumers and ruining the days of politicians (the cost of living is rising Sometimes you are lucky that someone will vote for you).
There are many reasons for that return. The coronavirus has put the brakes on the global economy and destroyed the intricate global supply chains that keep goods cheap. They haven’t been put together yet, and in fact probably won’t return in their pre-virus form. I thought. Perhaps there were drawbacks to relying on others for essential medical care. Perhaps it makes more sense to pay a little more for domestic capacity. If that applies to medicine, what about other necessities? Well you get the picture.
Russia’s attack on Ukraine has only sharpened the claws of inflation, given the former’s prominence in supplying energy and the latter’s important position as an agricultural exporter. began to follow. And here we are, inflation is still well above previous norms around the world.
Global Inflation Rate (%)
Source: World Bank, Macrotrends
2% inflation remains a broad target
Of course, monetary authorities who are obliged to fight it are not lazy. The US Federal Reserve (Fed) has been steadily raising interest rates since early 2022. U.S. borrowing costs are at their highest since 2007 and are set to rise further. Other central banks have taken similar steps.
But it will be difficult to get annualized inflation back into the central bank’s target box of “around 2%.” And to do so would likely require a massive and prolonged monetary tightening.
The world hasn’t gotten used to it for decades. As the inflationary environment intensifies, investment and trading patterns change.
At the most basic and obvious level, assets that offer explicit inflation protection are predictably back in fashion. Bonds guaranteed to pay a certain amount above the national inflation level are again hotly sought after. Think US Treasury Inflation Protected Securities (TIPS), UK index-linked bonds, etc.
Commodity markets also tend to benefit (oil outperforms remarkably during periods of inflation, according to last year’s Wells Fargo survey). This is because the price of finished goods manufactured using such raw material inputs increases.
In times of low inflation, holding cash was a priority for companies and investors. That doesn’t make much sense now that rising prices are eroding the purchasing power of cash at a much higher rate each month.
Demand for other real assets, from real estate and land to art and wine, is expected to rise. Basically anything other than cash.
spot Money versus. USD Index – 2022 to present (% change)
Source: Trading View
Does gold really help?
Gold is often touted as an excellent inflation hedge, but the oldest asset of them all should be careful. Gold is notoriously yielding nothing and despite inflation it would certainly have been better to hold on to the US dollar last year. We wanted a higher return with guaranteed high interest rates.
Gold certainly plays a role in inflation-hedging portfolios, and given the widespread belief that gold is an effective hedge, gold usually performs well when prices rise.
The stock market tends to favor consumer staples and real estate, as demand is likely to sustain even as prices rise. The luxury sector tends to decline as consumers focus on essentials.
Of course, inflation trading is subtly different from inflation investing. For example, inflation investors may choose to hold physical gold if they fear a price spike, while inflation investors may choose to trade gold derivatives and You are much more likely to take a position on the gold index. Inflation trading is usually aimed at profiting from future price increases. A bet on the rising US dollar against other currencies could also be part of an inflationary trade.
However, it is important for traders and investors to keep inflation in perspective. It may be rampant now, but the central bank continues to direct it down and his long-term forecast for US inflation is likely to settle around 2-2.5%. Perhaps higher than ever, but still very low by historical standards. As long as this proposition is followed, investments are likely to be tweaked rather than ripped apart in a big way.
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Will Inflation Roll Over?
The problem is that US inflation is well above that point for now. Her 6.4% in January is surprisingly close to a 40-year high despite these rate hikes. Also, US officials are doing relatively well in the fight against inflation. The latest data showed that eurozone prices were up 9.2%. In the UK he is 10.5%. Of course, there is a time lag between when interest rates rise and when prices return to normal.
But what makes the issue more interesting is when inflation doesn’t behave like the market. And while the interest rate hikes needed to fight inflation will be painful for overindebted economies accustomed to very low borrowing costs, there is broad consensus that the recession it will bring will be mild. If does not behave as expected and interest rates continue to rise, we can expect inflation to become increasingly prevalent.
Take a close look at your monthly data rounds.
— DailyFX by David Cottle