Questions surrounding inflation remain front and centre on investors’ minds and business can’t ignore this debate.
Is it noise or are we entering a new paradigm?
Are we returning to a 1970s style inflationary environment (the reason for the 1970s song reference)? I don’t think so. The macro conditions are quite different, though the more recent changes are inflationary (less globalisation, unprecedented fiscal and monetary stimulus, Central Banks aggressively targeting higher inflation).
Is inflation necessarily a bad thing? If deflation is a negative, can inflation be a negative? A little bit of inflation is a positive but where is the tipping point? This depends on the Central Bank reaction; if they fall behind the curve and need to aggressively hike rates to catch up.
There is no easy answer to all of these questions, however, one fact is unequivocally true ̶ today almost no one running a business in the developed world has experienced a sustainable period of higher inflation. And this is also true for investors.
“An environment of strong and synchronised global growth, rising commodity prices and inflation expectations is something that investors have not faced over the past twenty years.” (Goldman Sachs 14 June 2021)
Google trends in the USA search for “inflation” hit the highest levels on record.
Commodity Research Bureau Index is still well below post 2008 peaks but reported rapid increase in 2021.
Since the peak in the early 1980s, there have been around eight periods where bond yields have risen (defined as a rise from new lows). We are now in the ninth. Is this one different?
The Federal Reserve has just announced their new policy projections, targeting rate hikes in 2023? Is this really new news or just the Fed up to its old games of projecting inflation targeting success? As the chart of US CPI implies, inflation targeting has been a successful Central Bank strategy in controlling inflation but has been unsuccessful in trying to fuel sustainable price increases. (US CPI 1970 – today)
Add to this the need to change business models to adapt to ESG requirements plus the demands on business increasing exponentially.
Large scale investors can hedge some of their inflation risk. The best hedge for SMEs is a stronger capital base and a sustainable business plan ̶ and this is where Beckon can help SMEs build resilience and thrive.
"You can dance, you can jive, having the time of your life ..."
(*Dancing Queen by Abba was released in August 1976, it became ABBA's only US number one hit. In 2015, the song was inducted into the Grammy Hall of Fame)
David 'Bushy' Nolan
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