Tuesday, February 19, 2008

Inflation won’t go away

Why inflation is still a problem

Inflation is probably the last thing you're worrying about right now. After all, the coming slump will force retailers to cut prices and consumers to slash spending, won't it? Think again, says John Stepek.

Posted by damien @ 11:06 AM (591 views)
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One thought on “Inflation won’t go away

  • From FT Alphaville “Short View: Never forget, inflation is the real enemy

    In an uncertain world, where even in the UK a bank can be nationalised, there are some things on which we can rely, says John Authers in Tuesday’s Short View column. Last week, for the 53rd year in a row, saw the publication of the Barclays Equity Gilt study, which maps the performance of stocks and bonds in the UK.

    It had a familiar message: in the long term, stocks beat bonds. But this year’s edition also carried a warning.

    Over history, the great enemy of investors has been inflation. Equities have done little more than offer a hedge against it. From 1899 to 1985, UK equities’ real return, compared with UK retail prices, was negative. Stocks often failed to keep up with inflation. By 2007, the real return on UK equities since 1899 was 109 per cent, all of which had in effect been achieved in the past two decades. Over the same period, gilts lost 99.3 per cent of real purchasing power.

    What is remarkable about the past 20 years is not the performance of stocks, but the way inflation was contained.

    Now, Barclays says, this is coming to an end. Taking a four-year rolling average, inflation on both sides of the Atlantic has risen by more than 1 per cent during the current expansion – the first time this has happened since inflation was tamed in the early 1980s.

    This is attributable to the growth of the developing world. With China and other countries demanding more, and the supply of resources limited, the logical consequence is inflation.

    With inflation back as a real risk, policymakers no longer have the easy solution they have used for the past 20 years – cutting interest rates at the first sign of trouble. That implies the current credit crisis is not another turn in the cycle, but the end of an anomalous period when inflation was under control. It also implies the level of inflation in China is crucial. And the market expects Tuesday’s Chinese consumer price inflation number for January to be the highest in more than a decade.”

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