The Specter of Inflation is Back

The stock markets are nervous, and the number and intensity of fluctuations are increasing. The latest sales trigger was the 4.2% rise in US consumer prices in April, the highest in 39 years. After decades of absence, inflation seems to be coming back and with it the expert debates about its cause and duration, especially as rising commodity prices will also play their part. Price increases have been recorded for hotel and flight bookings as well as for used cars, suggesting that the reopening of the US economy has been used by some companies to increase their prices. But commodity prices are also moving north: copper and steel, for example, have increased by more than 19% this year alone, while the price of wood as an important building material in North America has more than sixfold since the outbreak of the Corona crisis.

Here again, the experts disagree on the cause and effect of these commodity price increases. Do they reflect a shortage of supply, which then leads to an undesirable “stagflation” with a tendency towards weak economic development and inflation, or are they signs and companions of a strong economic recovery, as was the case in the 1950s and 1960s and between 2000 and 2012?

And how do consumers and central banks react? Short-term one-off or corona catch-up effects are not inherently inflationary. The key factors are consumer expectations and confidence, as well as the spread of inflation to other sectors of the economy. If consumers fear rising inflation, they could prefer higher consumer spending (and thus fuel price acceleration) and, on the other hand, fight for higher wages as employees, leading to further wage-price spirals and a steadying of inflation.

Central banks, on the other hand, are facing the challenge of achieving an exit from a period of cheap money and zero interest rates that have lasted more than a decade without choking off a picking up economy, risking stronger corrections in equity and real estate markets, or imposing higher capital market interest rates on heavily indebted countries such as Italy and Greece. The central banks assess the causes and consequences differently. While theBank of Canada and the Bank of England seem to want to respond more quickly to emerging inflationary trends, the US Federal Reserve is not prepared to do so until inflation is too high.

There is no certainty as to whether there will be only one-off effects or permanent inflation. As a long-term oriented investor, however, you can strategically and tactically oppose and hedge against the possible inflation scenarios and their consequences with a highly diversified portfolio across all asset classes and professionally selected investment instruments.