Some thoughts on inflation, followed by some good money reads.
For most of the past two years, it’s been wrong to be worried about inflation. It’s also been pretty lonely, as the world has piled into bonds and bought gold much more as catastrophe insurance than on fears of an inflationary spiral.
When I thought US government bonds looked absurdly overvalued in late 2008, for instance, I was right from the perspective of the poor value they offered compared to equities, but wrong to fear they’d soon suffer at the hands of inflation. In fact, deflation remained the mood music in the US throughout 2009 and most of 2010.
In late 2010, however, the musical chairs have been shifting. A strange alliance of hedge funds, ancient investors like Jim Slater, and money bloggers seemed the first to worry about inflation. As the year ends it now seems every newspaper, fund manager, and man in the street is an inflation hawk.
Perhaps the shift has come about because after years of overshooting its target, the Bank of England now says it fully expects inflation to stay above 3% throughout 2011, too.
Bank insiders can give all the interesting speeches they like about why this is consistent with policy [pdf] but the suspicion is growing that keeping interest rates at record lows in the face of inflation 50% above target isn’t just a matter of needs (i.e. raising the rate would only hurt the nascent recovery, and it wouldn’t reduce input costs) or even musts (i.e. we can’t afford to crash the housing market) but actually a deliberate action to solve these problems by inflating away the UK’s personal and private debts.
This is dangerous stuff. Normally a growing consensus in investing is a reason to consider doing or thinking the opposite, but inflation isn’t like that – the whole danger is that consensus expectations for higher inflation get embedded in the system, leading to a self-fulfilling prophecy as people take steps to prepare for it.
True, the Bank and others are surely right that with unemployment high and the debut of true austerity Britain a mere two weeks away, workers aren’t in a position to bid up wages en masse.
But these things can quickly change, and pressures are already showing up in domestic areas like rising rents (see this graph – at the bottom of the page).
Also, not worrying about rising inflation because the consequences lie down the line is a bit like not worrying about higher blood pressure because you’re too young to have a heart attack. The time to take action is when you first spot the symptoms, not when you’re 60 and short of breath.
On balance, I’m not yet persuaded the UK authorities have decided to debauch the pound to inflate away our debts, though I’m sure all concerned are happier with inflation at 3.5% than at 0.5%.
But as an investor, I’m trying not to take any chances.
From the financial blogs
- Cool charts showing long-run US investment returns… – Get Rich Slowly
- …and reasons not to be overly reassured by them – Oblivious Investor
- Love and investing – The Psy-Fi blog
- Investing: Coin flip or skill – Investing Caffeine
- The tyranny of fund league tables – The Munro Fund
- UK inflation outlook if this time isn’t different [PDF] – Bank of England
- US Treasuries vs historical inflation – Henderson
- Hurricanes: Radical solution to US housing woes – Capital Chronicle
- Repressive democracy – Stumbling and Mumbling
Mainstream money media
- Globalisation: The redistribution of hope – The Economist
- Dutch pension savers 50% richer than fee-ravaged Brits – Telegraph
- HMRC targets tax evasion to boost revenues – Telegraph
- Cash savings guarantee limit lifted to £85,000 – Guardian
- How to invest in Facebook and Twitter – Motley Fool
- Vanguard concerned over emerging market inflows – FT
- Early access to pensions being mooted – FT
- Wealthy should get into VCTs while they can – FT
- How to invest in English fizzy wine – FT
- Crystal balls from various fund managers [on 2011] – Independent
- Investing in junior oil companies – Independent
- Buying US repossessed homes – Independent
- How to curb bank bonuses – BBC
- How the ordnance survey makes money – BBC
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