Investment Research Group
|
The low inflation rate in recent years was to large extent subsidised by China, which exported ever cheaper appliances and other products to the West, thanks to its own low wage and cost manufacturing base. But that is ending as Chinese workers start to demand a part in the prosperity they have created, and the pressure to lift wages increases.
US commentator Adrian Ash points to another pressure on inflation which is just as big as China. That is the increasing demand for commodities, which is driving up prices of raw materials that go into nearly everything. The rise in price of commodities creates the perfect background for inflation to take off.
Indeed, investment in commodities and gold is one way to hedge a portfolio against the ravages created by inflation. "...Wall Street and the City are suddenly piling into the commodity markets. Expect a side-order of '70s style inflation to hit your dinner table as a result", he warns.
"Investment-fund interest in commodities isn't new, of course; Merrill Lynch's World Mining fund, for instance, has grown nearly six times over since 2002. It grew another 18% last month alone."
"But the urgency of this switch into commodities - driven by the flight from property and paper - is something else entirely. The PhDs who cooked up the US housing bubble are now applying their haute finance skills to gearing up the cost of natural resources," he believes.
Crude oil has more than quadrupled in barely five years. Wheat prices have doubled since April this year. Gold, that seer of price-inflation ahead, has shot 15% higher in the last eight weeks alone. The current move in gold was kick-started by the world's biggest central bank - the US Fed - cutting the price of dollars borrowed by the world's biggest commercial banks.
When unlimited money-supply growth crashes into rising demand for limited-supply essentials - such as natural gas, copper, soybeans and cocoa - the result is sure to be price inflation as violent as the monetary inflation that preceded it.
"Add a sudden wall of money from Wall Street, the City, Frankfurt, Paris and Tokyo...all seeking a growth market to replace the can't-lose gamble of home-loan trading and credit...and the surge in basic resource prices will only accelerate."
In an environment of rising inflation, shares tend to do okay as long as the inflation rate grows at a low steady rate. Most good companies can build in inflation into their prices. But over the long term and in an environment of rapidly rising inflation, many companies suffer and so of course do their shares.
Inflation is something investors need to watch closely, and respond to with changes in asset allocation and share selection. Some shares, of course, are more vulnerable to rising inflation and one should avoid companies with high debt levels and small margins.
Ironically, high inflation might give the property market its second wind as property is not averse to a bit of inflation that increases the replacement cost of buildings. Overall, however, inflation is our enemy, not our friend.
