Inflation

Rinoa

Will continued money printing let the 'inflation genie' out of the bottle?

Some think it may.

http://www.telegraph.co.uk/finance/personalfinance/investing/9796670/Bill-Mott-The-inflation-proof-shares-Im-buying.html

We think we may be approaching an inflection point where the markets start to worry more about inflation. Why are we more worried about inflation now than we were three months ago? The short answer is that policy has become more and more extreme. Here are five reasons why:

1. Quantitative easing is now unlimited. QE (aka ‘money printing’) in the US is now open-ended, so potentially unlimited. The Federal Reserve is buying $40bn of Mortgage Backed Securities and $45bn of Treasuries per month. At an annualised rate, this amounts to a suspiciously handy 90pc of the 2012 Federal deficit.

2. Ultra low interest rate policy is being misdirected. The US Federal Reserve has explicitly said that they will keep interest rates near zero until unemployment falls to 6.5pc. Even if this is a sensible target, interest rates are, in our view, the wrong tool to achieve it. What about supply side conditions? What if more than 6.5pc of the American workforce is in practice unemployable in a higher value-added economy? This opens the prospect of interest rates staying too low for too long.

3. Everyone is trying to kill their currency. The US is not alone in engaging in wide-scale QE. Most of the major currencies have central banks that are looking to print money to, amongst other things, reduce the relative value of their currencies in an attempt to promote exports. Japan has just redoubled its efforts. This beggar-thy-neighbour approach may work for one country, but if everyone is at it, it is doomed to failure. But it does reduce the value of paper money compared to physical goods and services. This is inflation.

4. The Bank of England potentially giving up on inflation targeting. The successor to Mervyn King as Governor of the Bank of England, Mark Carney, has raised the prospect of replacing the current inflation targeting regime with a framework that aims at a nominal GDP number. We see this as a smoke screen to allow higher inflation in a low growth world.

5. Imported disinflation is over. Western consumers (and central banks) have benefited enormously from the shift in manufacturing to the emerging markets and, in particular, to China. Buying ever cheaper imported finished goods, from socks to televisions, has had a massively dampening impact on western inflation. The benefits of this are now largely played out. Anything that could be ‘off-shored’ already has been. And more importantly, emerging markets are now seeing significant wage increases which will result in higher prices for the end consumers.

Property could be a good hedge, especially if you buy with a big fat mortgage.

Generali

Rinoa wrote: »

Property could be a good hedge, especially if you buy with a big fat mortgage.

Property is a good inflation hedge as its value, measured by the housing it provides for you, remains unchanged regardless of inflation.

However, regarding the mortgage, as anyone around in the early 1990s can tell you, high inflation leads to high interest rates which makes large mortgages tough to service.

Thrugelmir

Rinoa wrote: »

Property could be a good hedge, especially if you buy with a big fat mortgage.

Article is referring to USA. The UK has other issues to contend with.
Not least that property prices have not adjusted as was the case in the USA.

Time to invest in smaller companies. Thats where the growth will come from.

lvader

Thrugelmir wrote: »

Not least that property prices have not adjusted as was the case in the USA.

They did, it was just masked by the drop in value of the pound.

HAMISH_MCTAVISH

The Bank of England potentially giving up on inflation targeting. The successor to Mervyn King as Governor of the Bank of England, Mark Carney, has raised the prospect of replacing the current inflation targeting regime with a framework that aims at a nominal GDP number. We see this as a smoke screen to allow higher inflation in a low growth world.

Can't see rates rising much in the next decade or so anyway.

homelessskilledworker

Rinoa wrote: »

Will continued money printing let the 'inflation genie' out of the bottle?

Some think it may.

http://www.telegraph.co.uk/finance/personalfinance/investing/9796670/Bill-Mott-The-inflation-proof-shares-Im-buying.html



Property could be a good hedge, especially if you buy with a big fat mortgage.

Yes it could be, and it is my biggest fear.

Let inflation out of the bottle would solve that debt crisis to a point, but the damage it would do to UK PLC would be devastaing.

Fella

HAMISH_MCTAVISH wrote: »

Can't see rates rising much in the next decade or so anyway.

Although....the coalition will be substantially more incentivised to inflate away debt once benefits are de-linked from inflation. I wonder if this weeks first step towards that may actually turn out to be significant. I think the Govt would be secretly delighted with inflation circa 5% for a few years.

Graham_Devon

Housing may be a good hedge.

But that's only any good to anyone who can afford to buy a house (or second house) and so on.

The damage done to the economy would be dire for all those who can't hedge against it.

Treadmill

I'd like to see RPI run at about 10% for a few years, our pay rise is set at 0.5% above RPI. That would certainly eat into the mortgage.

GeorgeHowell

The currency will be as debased as the moral fibre and integrity of our politicians.

grizzly1911

Treadmill wrote: »

I'd like to see RPI run at about 10% for a few years, our pay rise is set at 0.5% above RPI. That would certainly eat into the mortgage.

Might just be able to keep up with you rising mortgae payments then.