Money Express: You need a plan to deal with rising inflation risk

Official inflation in Ireland is about 2%, allegedly. In the UK it is 2.7% and is reported to be lower in the eurozone.

Official inflation in Ireland is about 2%, allegedly. In the UK it is 2.7% and is reported to be lower in the eurozone.

Money Express with Jill Kerby in association with Laya Healthcare

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The note of scepticism is because I don’t know a single person outside the rarified environment of government who believes that the cost of living is only raising by 2% per annum, and are clearly unaware that disposable incomes are actually going down.

Since price inflation is always caused by too much new money chasing too few goods – there has been an expectation by many critics of the central banks who have pumped up the global money supply since 2008 (for bank and sovereign bail-outs) that there could be not just a big, but a hyper-rise of prices this or next year.

Retail price inflation hasn’t happened yet, but commodity prices have certainly soared – oil, agri/food, precious metals, plus government services like health, transport and education. US and UK stock markets are sharply too (the recipients of quantitative easing(QE) and the wealth of the super rich (the 1%) has also soared since 2008.

Inflation is bad for savers and fixed incomes, but it’s a very good thing for debtors, say the policymakers, both for private individuals carrying lots of mortgage debt, for example, and especially for hugely indebted governments who are keen to repay lenders with brand new, devalued dollars/pounds/yen/euro.

Japan is the latest country to announce that its currency is too strong and needs to be debased to give a boost to their exporters and cut their massive debts. (This, of course is a subsidy that the Japanese people will pay – the stealth tax effect of inflation.)

America, Britain and most of the EU also claim that higher prices caused by inflating the money supply will ‘stimulate’ more spending and less saving. (Why hold onto money if everything just keeps getting more expensive, say the inflationistas.)

Last week I wrote that there is a body of opinion that is deeply concerned that if the inflation alchemists are let loose this time, specifically to reduce debt levels (and not just bail out the bankrupt financial industry or Greece) they could lose control. They warn that if that happens – after hundreds of billions more of new money is added to the trillions created since 2008 - the escaped inflation genie would devastate living standards and actually destroy, not create jobs.

So what should you do?

Mark Tenwick of IFG Pensions says that the primary purpose of quantitative easing is to buy time for consumers, business owners and banks to deleverage their balance sheets and work through their problems”. But that also needs a return of bank lending – a pick up in the velocity of money. “If money velocity accelerates as quickly as it did in the late 1970s, then we are likely to see similar levels of inflation during 2013 and 2014.”

“Stocks are a good hedge against inflation,” and his company favours “emerging market and pacific basin equities [that] offer a better inflation hedge as they are closely correlated with commodities. Commodities, emerging market and pacific basin equities have rallied by several hundred percent [over the past 12 years]…and the bull market in commodities is still intact.”

Tenwick also recommends buying gold and silver, “the only currencies in the world that cannot be printed and debased. Over the next two years, we believe investors should avoid the US dollar, safe haven government bonds (US, German, UK) and the Japanese yen as these are deflationary assets and therefore ill-suited for an inflationary environment.”

In his Q1 2013 ‘Outlook’ for clients, financial advisor Eddie Hobbs wrote that he too expects more quantitative easing “on a herculean scale. The expansion of the balance sheets of the ECB, FED, BOE and BOJ is without measure anywhere in economic history and it’s pretty much fiscal expansion now or bust.”

Hobbs says high inflationary forces haven’t been triggered so far “but that’s only because of huge output gaps depressing inflation. We expect historically low bond yields to continue but, ultimately, the fixed income bond market will sour as interest rates follow inflation, albeit delayed by central bank nervousness over strangling recoveries. That’s why we continue to emphasise global inflation-linked Government bonds protected with a Euro hedge” specifically, gold and silver that will protect “fiat currencies from too much QE and to counteract inflation.”

Hobbs also recommends European shares for investors who want longer term growth, as well as US and Asia (ex Japan) growth funds and global natural resources funds, especially those that include precious metal, oil, gas and coal miners.

Jeff Clark is the editor of the US investment newsletters, Advanced Income and Casey’s Gold and Resources Report. Rampant inflation, says Clark, means that “nobody’s current standard of living can be maintained without an extremely effective plan for keeping up with inflation.”

Consensus? It would seem so: unloved shares (like Europe’s), short-term inflation-linked government bonds and precious metals. It looks like a classic, ‘do no harm’ strategy that aims to preserve wealth, but be sure to get your own second or third opinion, ideally from a fee-based advisor.

jill@jillkerby.ie