Tutorials

Prepare for an inflationary world

Many investors are still worrying about a deflationary crisis. They shouldn't be. And neither should you, says John Stepek. What you should worry about is how inflation would affect your money.

Quick quiz: which developed-market country this week reported annual wage growth that was nearly three percentage points above inflation? Believe it or not, it was Japan. Workers in the one country most synonymous with deflation saw their pay packets grow by 3.6% in June, compared with last year. Price inflation as measured by the consumer price index (CPI) was just 0.7% in the same month. So that's a real (after-inflation) pay rise of 2.9%. Not bad at all.

Now you can pick holes in the data, which is very volatile. The headline figure includes both summer bonuses and a big jump in overtime pay. Underlying earnings were up by 1.3%, the same as last month, notes Jonathan Allum of SMBC Nikko. But even taking those points into account, note that this is the sharpest rise seen since 1997. And it's not the only sign of incipient inflation in Japan, notes Allum wholesale prices are rising at a rate "not seen since the 1990s".

Why should you care? First, it shows that, even in the apparently most stubbornly deflationary environments, price rises can take hold once the conditions are right. In Japan's case, this has involved a virtually bottomless pit of money printing by the central bank, and an unemployment rate that has fallen to a tiny 2.4%. But the point is, it has started.

Second, it always takes a long time for investors to get over the last crisis. I think it's fair to say that a majority of investors are still more frightened about the prospect of a repeat of 2008 a deflationary debt-driven crisis than they are about anything else. As a result, they pay a lot of attention to things that point in that direction (such as the sliding copper price and falling Chinese share prices) and far less attention to things that might contradict this narrative (such as surging Japanese wages, for example).

Yet as Karen Ward noted in the Financial Times this week, there is nothing inevitable about deflation. Recent decades saw several major changes that unleashed disinflation across the world, from China joining the global goods market to the internet's role in keeping prices down. But not only have those trends arguably already peaked, but the shift in the political picture is actively reversing them. Tariffs will make Chinese goods more expensive. Tech companies are prominent that is, highly taxable targets for angry voters.

So it might be worth spending some time considering how a more inflationary world would affect your money. As Ward puts it: "Government bonds are unlikely to be the asset that will protect portfolios." We'd suggest owning at least a little gold.

Recommended

The charts that matter: inflation, bubbles, and booze
Economy

The charts that matter: inflation, bubbles, and booze

As US stocks head higher into bubble territory, John Stepek looks at the charts that matter most to the global economy.
23 Jan 2021
23 January 1967: Milton Keynes founded
This day in history

23 January 1967: Milton Keynes founded

The most famous of Britain's garden cities, Milton Keynes in Buckinghamshire, was founded on this day in 1967.
23 Jan 2021
Quiz of the week 16-22 January
Economy

Quiz of the week 16-22 January

A Japanese car-maker announced plans to continue its UK operation, safeguarding 6,000 British jobs. But which one? And what else happened this week? T…
22 Jan 2021
22 January 1924: Ramsay MacDonald becomes prime minister
This day in history

22 January 1924: Ramsay MacDonald becomes prime minister

Ramsay MacDonald was one of the founder members of the Labour party, which he took to power on this day in 1924.
22 Jan 2021

Most Popular

The FTSE 100 is set for a makeover with an influx of new tech stocks
UK stockmarkets

The FTSE 100 is set for a makeover with an influx of new tech stocks

The FTSE 100 – the dullest index in the world – is about to reinvent itself as a host of new firms list on the market. The change is long overdue, say…
24 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021
Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021