Rising inflation and your investments

We have noted before that there is a mismatch between what governments state as the official inflation rate, and what we feel when purchasing items or paying bills. Over the years we have seen inflation rates come down to levels unheard of in the eighties. Along with these lower inflation rates we have also seen interest rates fall, resulting in the cash portion of your portfolio yielding almost nothing and bonds providing very good capital growth. There was even a time when people were starting to whisper about deflation, when the price of goods and services go down. So, you go to discuss your annual salary increase and they tell you that you will be getting a 5% salary decrease.

Now it must be said that the way our financial system works, makes it much easier for us to manage inflation than to manage deflation; so a moderate, steady increase in the price of goods and services is not a bad thing. However, unexpected jumps in inflation – or hyperinflation – is bad. Currently we see the leading economy in the world keeping interest rates very low and printing dollars like there is no tomorrow. The reason they give, is that most of the inflation spikes we see are transitory and will not last. There are, however, some longer-term changes in our world which should be taken into account. China used to be a big deflationary power by producing goods cheaper than the West. This is now changing. Globalization; productivity caused by technology; and even changing demographics; have helped to drive inflation down.

We are seeing some of these deflationary drivers reversing in the form of government policy; political differences; transitioning to greener energy; and sustainable living. We might be on the cusp of a cycle of higher inflation and it seems that the Central Banks of the world are behind the curve. The impact of this changing world will be an increased demand for things like platinum, palladium, rhodium, etc. So when it comes to your investments, South African shares will benefit in the form of resources companies and even gold mines. Gold is seen as a hedge against inflation like any other real asset. Cash will yield higher returns so that will help some pensioners and even longer-term SA bonds could benefit. USA bonds should be avoided and those large growth companies with very high valuations will go nowhere.

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