Is Stagflation round the corner?
Is Stagflation round the corner?
A recent paper written by Jaravel and O’Connell for the Institute for Fiscal Studies (IFS) found that there was a sizeable increase in inflation felt by consumers during the lockdown period. On an annualised basis this uptick would represent inflation of 12%.
This uptick in inflation came via supply side, or cost-push inflation. This means that the costs of goods are rising due to higher costs of production or most likely given current events, the additional costs in complying with new regulations brought about by COVID-19. Ordinarily, the solution to this type of inflation is via cost reduction or loosening of other regulations – for example the Government’s VAT cut for the hospitality sector is an attempt to offset the increased costs which are being passed onto consumers.
This type of inflation alongside declining economic activity and increasing unemployment (when the Furlough scheme ends in October) could ultimately lead to a prolonged period of stagflation similar to that of the 1970s which saw rising commodity prices, falling productivity and structural unemployment.
Whilst we hope that the supply side inflation currently in place will be shorter-lived than that of the 1970s, this may only come about due to the deflationary impact of the recession and a reduction in the costs of the COVID-19 regulation should this situation improve.
In such circumstances, assets that may help to protect Investors wealth include Inflation-Linked Bonds, Gold and Commodities – all of which are included within our recommended Portfolios.
There are lots of additional factors that play a part in shaping the future path of inflation; including exchange rates, interest rates and trade tariffs to name but a few. The future path of inflation is not set and there is no certainty that we will see inflation like the 70’s or the deflation of the 30’s which were extreme events…but it doesn’t hurt to prepare for them.