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Inflation: Dr Jekyll and Mr Hyde

January 8th 2021 – Written by Financial Planning Wales Ltd

Inflation: Dr Jekyll and Mr Hyde  


Inflation, in Ed Easterling’s Unexpected Returns, is described as being as two-faced as Dr Jekyll and Mr Hyde.  


Dr Jekyll views prices increases as the economy’s way of regulating supply and demand. That rising prices during periods of limited supply or excessive demand are a fundamental law of economics. Ultimately, these swings in price are seen as being self-regulating. Higher prices encourage producers to create more supply to meet the rising demand. Alternatively, price declines tend to reduce excess capacity. Both realities are considered a normal function of markets.  


However, Mr Hyde – who in this allegory is a Central Bank, believes that the supply of money can be manipulated to kindle economic growth. For example, if Mr Hyde employs a supportive monetary policy via low interest rates and/or quantitative easing, his goal is to stimulate inflation by increasing the supply of money in the economy with the eventual effect of raising the price of all goods and services. However, economic growth will not be created unless there is growth in the amount of goods to buy. If the growth in the money supply exceeds growth in production, inflation will increase.  


It seems ever more likely that we will see Mr Hyde as Governments and Central Banks see the necessity of inflation in reducing the ever-increasing debt burden accumulated due to recent events.  However, with Mr Hyde using most weapons in his arsenal to stimulate inflation he may be dependent on cost-push inflation, whereby higher costs of production increase the cost of goods. This may occur via compliance with COVID regulations, tariff costs associated with post-Brexit trade deals and rising commodity prices.


As such our Investment Strategy continues to retain a key focus on inflation protection with allocations towards Index Linked Gilts, Treasury Inflation Protected Securities (TIPS) and Precious Metals (Gold & Silver). We hope that these allocations will protect the purchasing power of Portfolios over the longer term – this is of particular importance for investors who are conscious of how inflation can erode the value of their investments.  


Financial Planning Wales - Positive start to 2021 


We are pleased to report that John has recently been awarded Chartered Financial Planner status following the completion of advanced qualifications with the Chartered Insurance Institute (CII).  


Chartered status is considered the Gold Standard in the Financial Planning Industry and as a Chartered Financial Planning Firm we are keen to promote the personal development of our staff to ensure their technical knowledge is of the highest standard. 


Congratulations John.

EST. 1999