There was a very interesting piece on Charles Goodhart’s book ‘The Great Demographic Revival’ in the FT last week. It was buried near the back of the Paper but flagged by respected columnist Martin Wolf. The book notes that after such a period of global borrowing and spending, there becomes something of an inevitability of rising inflation and I have tended to agree. After all, borrowers (governments!) need inflation to diminish the real value of all the debts they cannot afford to redeem. It could be 5%pa – or it could be 10%. The book goes on to note that changing global demographics will have a hand in this and then, governments will rediscover that when the inflation genie is out of the bottle it is nigh impossible to control. Some inflation is good, we like to feel we are earning more, seeing the values of our assets and homes increasing, etc, even if that is related to higher prices for goods and services we pay. Everyone hopes they gain as much as they lose but… there will be some big losers. Many middle-aged and younger people have never seen inflation of note. They don’t know what it is like realising that £1000 in the bank is only worth £900 at the end of the year or that as banks ratchet-up interest rates to dampen demand and control inflationary increases that their mortgage payments will rise – and considerably. That will have a devastating impact on the residential property market which is already way above its long-term inflationary increase chart… (remember that as much as 40% of all residential property prices is represented by debt so the unscrambling could be colossal). Of course, governments then are likely to have to pay higher interest on their debt too… but maybe they will keep manipulating interest rates for that so they don’t…
Can you prepare? Yes – you can ensure you are not over-borrowed against things like inanimate houses and that you could afford increases in your home’s mortgage costs. You should also have real assets which have the opportunity of increasing in line with inflation – such as shares in companies which will increase their goods and services’ prices to keep-up and thus their profits. Don’t keep too much in cash as that will fall in buying power – three years at 10%pa inflation means that your £1 would be worth just over 70p then (even if you may receive a little interest on it for a change) – ouch – but the money in real assets should be at £133.10 instead as well as paying you dividends (not that anything is ever that linear!). Latest research shows that in cash ISAs alone UK savers hold over £270billion and for much of that the savers do not know the interest rate! Wow! Can you afford that risk and indeed the lost opportunity?
