OVER the last month I’ve written extensively about inflation and the cost of living, just in time for it to keep rising as petrol/fuel prices soar.
When this happens, the blame is still placed on the “man in the street” who hoards and fills up his cars. No. You only have one car to fill up, just like normal prices.
Undoubtedly supply issues have pushed up most prices as demand for many products has remained steady, but the same cannot necessarily be said for oil/fuel.
Consider that in January, only nine percent of employees had returned to their desks permanently in the wake of the pandemic. A survey found that 39 percent will work from home permanently.
Trust me – that’s a significant drop in demand, so the supply/demand argument wobbles here. The Opec cartel then shrugged and agreed to a modest 400,000 additional barrels of oil per day, which it agreed to last July.
Recall that oil prices hit a low of $0 a barrel and Donald Trump pushed for oil cuts to boost prices and take care of the oil industry.
Surely investment should have shifted to energy efficient homes and cars, where the consumer is no longer at the whim of a group of nations that have a vested interest in price.
Inflation is tough on investors, savers and extremely tough on those who don’t have investments or cash to pay their bills. If inflation were stubborn, it would be difficult for mortgage borrowers as well.
A 3% increase for savers would have significantly less overall benefit to the economy than a 3% increase in mortgage rates, as it would have devastated the housing and mortgage markets.
In a debt-driven economy, where our “equity” is a measure of our wealth, falling home prices would plummet confidence.
Before considering where to protect yourself, consider what the futures markets are considering.
In a future, you agree with another party to buy or sell something at a future price.
It is effectively a bet where party “A” believes that the price of an asset will be different than party “B” (either up or down). In any case, the price is fixed and traded on public exchanges.
Commodity prices have priced in a decline from current levels. Commodities are things like oil, wheat and corn, meaning what’s on your shopping list and what affects your cost of living.
Futures contracts for March 2023 in corn, soybeans, for example, are trading seven percent below today’s price.
This is true of many commodity markets and is known as “backwardation,” where futures are priced cheaper than they are today.
This supports the view that inflation is temporary. Two key aspects supporting this are the UK and US government debt. Currently at record levels, the cost of repaying debt increases with interest rates.
The UK central government debt cost was £5.6 billion in October 2021, a staggering £3.8 billion more than a year earlier.
The US $21 trillion debt coupled with its large and growing deficit is also a problem.
Because interest rates are low, and have been for some time, interest payments are low. If inflation persists, interest rates will rise and governments will have to raise taxes, borrow more to meet higher interest costs, or cut spending.
This can also happen in times of wage demands. This, ladies and gentlemen, is not a good party.
It is therefore very interesting to see that central banks remain calm on rate hikes and believe that this is a ship passing by.
While some suggest that commodity investing is a hedge against inflation and suggest that it is price correlated, hence a diversification of stocks, all my studies show that this is not necessarily true.
It’s good for surprise inflation, but that ship has sailed. While the S&P 500 fell 21.54 percent in 1987, the S&P GSCI (a basket of 24 commodities) rose 1.05 percent.
In 2008, the latter fell 46 percent compared to the S&P 500’s 37 percent decline. More on that later.
Peter McGahan is Chief Executive of independent financial adviser Worldwide Financial Planning, which is authorized and regulated by the Financial Conduct Authority. For a free review of your investments, call Darren McKeever on 028 6863 2692, email [email protected] or visit wwfp.net