Inflation, stagflation & deflation as reminders

01 June 2020

We are all acutely aware that the nations of the world have hit a big 'stop' button at varying times over the course of 2020. With lockdowns continuing, and easing in some cases, it may be many months before we reach any form of normality...whatever that will now look like.

Of course, this has had a dramatic effect on most global economies, with a range of significant effects being predicted, and in some cases already witnessed at the fallout begins to take its toll. Sharp rises in unemployment, talk of deep recession, significant falls in production, and government borrowing in many cases going through the roof. The UK government issued a Bond on 20 May at, for the first time ever, a negative yield of 0.0003%, which in principle means you are paying for the pleasure of owning this new Bond (noting the Bond has a coupon of 0.75%).

On the same day, the Office for National Statistics noted a sharp fall in the Consumer Prices Index including owner occupiers' housing costs (CPIH) fell from 1.5% in March 2020 to 0.9% in April 2020. The Bank of England's target for inflation remains at 2.0%, although this may now vary once reviewed in light of the effects of the pandemic, and perhaps under the newly appointed Governor.

With this note to inflation, it is some years since we have considered alternatives to inflation, such as stagflation, and even deflation.

Stagflation is normally a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. We have some of these economic factors now applying, although inflation rates are low and falling.

Deflation usually means a general decline in prices for goods and services, which can be experienced with a contraction in the supply of money and credit in the economy. Demand has fallen, although it will take a few more months to define a trend.

It will be interesting to see if inflation, deflation, or some form of stagflation come into play in the UK in the next few months. In principle, inflation is good because it can drive economic demand. As you may guess, the other two options are not so good for an economy, with deflation having (from past experience and not a guarantee of future performance) a reverse effect.

As we move into the summer of 2020, a regular review your financial planning is usually recommended and please contact the team at Chapters Financial to see how they can help in your circumstances.

No individual advice is provided during the course of this blog.

Keith Churchouse FPFS

Director

CFP Chartered FCSI

Chartered Financial Planner

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