I wanted to mention the ‘I’ word!09 April 2021
As far as global economics go, it has been a very strange year. Indeed, it has been a strange year in every aspect of life as the pandemic has accelerated, and the wonders of medical science have resulted in the numerous vaccines being rolled out.
With the panic now under control, or perhaps controlled, many nations are looking forward in both economic terms and again in medical science. Evolutions of nasal sprays, pills and booster vaccines are now being trialled as we start to live alongside COVID-19 and its variants, as we do with the influenza virus. Future annual 'booster' jabs I would anticipate will be a combined 2-in-1 solution.
As we also start to see 'road-maps' to civil freedoms being detailed, it is anticipated that consumer spending will return as society begins to be restored. And spending is the lifeblood of any economy. To some extent, it is not the amount that something costs, it's the fact that we are putting cash-flow into the monetary system that creates further spending, jobs, business growth and of course taxes.
Importantly though, this flow of money can also have the effect of creating inflation, the 'I' word. It is easy to think that the last decade or so has been 'normal', with inflation rates at ultra-low levels. This has meant that bank base rates have bumbled along the bottom because these are one major tool used to control inflation. And if there's no inflation to control, you don't need high interest rates. Most economies have liked low inflation for years now.
However, is there a change coming? Many think so. Let's head back to the pandemic (sorry!), and the mountains of debt that governments across the globe have taken on. It's a bit quiet on that front, but whilst borrowing costs are so low, piling on debt for many nations has been cheap, and if it keeps the all-important cashflow going then most have considered it a price worth paying. But this does not mean that the debt is under control, or that a planned pay-down process is in place. Some major economists have indicated their approval of additional national borrowing to get their respective economies going first, and then worry about it later.
Inflation is not a bad thing; indeed stagnation and deflation are worse. High inflation can be difficult, but it has its advantages, especially if you have high debt levels, simply because inflation has the effect of eroding debt. Some might think that a healthy bout of inflation might erode the debt that governments have amassed. There is nothing new in this thinking - just look back to the UK economy of the 1970s and 1980s.
Looking forward, from a personal financial planning perspective, we have not really had to deal with high inflation rates for over a decade. If base rates rise to control inflation if and when it increases, this might mean higher deposit returns, increased annuity and mortgage / loan rates and higher costs in the shops. Equities may gain as the spending filters through, but they might need to, to pay for higher price goods.
We know that the world has changed and will evolve post pandemic. But in the same way we might need to take on different booster jabs, we also might need to be ready for another economic variant, not really seen for years, called inflation.
No individual advice is provided in this blog.
Keith Churchouse FPFS
CFP Chartered FCSI
Chartered Financial Planner
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