Inflation.. It’s COMING!

Inflation, in the most part, has been well contained throughout history. Low levels of inflation are considered attractive, as they are typically associated with better investment returns than high inflation or deflation.

During recent months, hyper-inflation and deflation are obvious concerns for policy makers. Although the chart below examines US inflation, the high level of correlation between inflation levels globally would suggest that the conclusions are equally applicable to other developed economies. The last 138 years have seen 58 months with deflation of 10% or greater and 185 months with inflation of 10% or greater.

THERE IS UNCERTAINTY ABOUT WHAT INFLATION WILL LOOK LIKE IN THE COMING YEAR!

As we move into 2010, INFLATION is one of my main concerns. As central banks exit their quantitative easing programmes, there is an awareness of the timing risks involved. There might be 2 scenarios:
Scenario 1: If they exit too fast, too early and the nascent recovery may be choked off.
Scenario 2: If they exit too slowly and the risk is that inflationary pressures will build out of control!

How to Protect An Investment Portfolio from Inflation?
1) The most obvious is to own assets which benefit from the causes of that inflationary pressure. These could be broadly termed as “real assets” (the likes of COMMODITIES!).

2) Another approach would be to own shares in companies that produce or invest in these assets.

3) For those who suspect that inflation may be a risk but aren’t sure of the timing of that risk or of its extent, a well-diversified portfolio makes sense. Asset allocation flexibility is a key consideration if your views are not strongly formed at this time.

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