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The threat, or promise, of inflation

Even if it comes, would it be a good thing?
While the fiscal stimulus packages have been enormous, they might not be inflationary in the way one might expect. Image: Supplied

With the scale of monetary and fiscal stimulus introduced to the world economy this year, the potential for inflation has become something that many investors worry about.

Earlier this year, Foord Asset Management’s CIO, Dave Foord, expressed his concern that hyperinflation was going to be the inevitable result of the interventions by governments and central banks.

“It has become easier and easier for governments to spend other people’s money because money is cheap,” said Foord. “And now you have modern monetary theory, which is being labelled by some people as the ‘magic money tree’. They have been able to find a tree where money grows, so politicians are lining up to spend this money and they are spending it now.”


However, there are, as yet, no signs of inflation coming through. Despite the scale of the stimulus, the factors most at play in the world economy remain deflationary.


Even though the development of vaccines does create the possibility for higher growth, Samy Chaar, chief economist at Swiss Private Bank Lombard Odier, sees a mild outlook. This is because of the competing forces at play.

“We expect inflation to recover, but to stay moderate,” said Chaar. “We think what’s going to happen with prices is that some of the very depreciated prices because of Covid, for example airline fares, should recover somewhat as restrictions are lifted by summer 2021. But some of the prices that increased in 2020, such as food at home delivery, should start getting back in line.

“So, you’ll have convergence,” he said. “Overall, we expect inflation to stay pretty well contained.”

Employment is key

Johanna Kyrklund, CIO at Schroders, is similarly sanguine.

“We’ve had this view that inflation isn’t a problem for a number of years,” said Kyrklund. “We’ve been in an environment where growth is very anaemic.”

This makes it difficult for inflation to shift higher rapidly because of how this is reflected in wage growth.

“It really comes down to employment,” said Kyrklund. “If we were to expect a rapid acceleration in wage growth, that is ultimately what would drive inflation.”

She however sees a number of factors against that happening. Technology and the demographics in the developed world in particular are suppressing wages.

While the size of the fiscal stimulus packages is enormous, they may also not be inflationary in the way one might expect them to be.


“The fiscal stimulus is replacing demand that was lost,” said Kyrklund. “It is filling a hole that was created. It is not driving people to spend more, but rather making sure people don’t stop spending altogether.”

With that said, even if inflation did return, Kyrklund doesn’t necessarily see it as a risk.

“If inflation picked up, initially it would be great for markets,” she said. “It would show that we’re not going down the same route as Japan.

“I think it would be very beneficial for equities in particular if it picked up. I would see it as bullish. It would cause a rotation under the surface, but ultimately it would be good news for me.

“It’s a risk I don’t worry about, because if it did come through it would make things better.”

Listen to this MoneywebNOW podcast by Simon Brown (or read the transcript here): 

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.


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Inflation = Debt of a country. Serves no purpose to grow an economy at 3% but at the same time debt grows at 7-8%. Furthermore facts should be argued, not slandering people with words of low inflation.
Clover 2l full cream milk (2011) R10.99/2l, now it is R33/2l, resulting in 200% increase over 9 years. That is serious inflation, not reflected in normal calculations of inflation figures. Governments lie to easily about the true facts.

The main problem with all these stimulus programs is that they have been given to businesses and business people with the very poor idea that the money will trickle down to employees.

This mentality has created a more unequal world with a slowing economy, the rich have gotten richer whilst they poor have been made poorer.

A proven fact is that a rich person contributes $0.38 to the economy for every dollar that they spend whilst a poor persons contributes $1.20 dollars to the economy for every dollar they spend.

Global Debt is at a staggering $60 Trillion and has no intrinsic value because it is based on lies, collusion and the perception of “cheap money”.

That is not stimulus, that is regression and devaluation.

This is probably the main reason why I stand for a Universal Basic Income and anti Welfare expense and a Scaling Transaction Tax system as a solution to the world’s problems.

The world is at the end of the long term debt cycle that lasted since 1971. This stage of the credit cycle is marked by deflation, credit contraction or deleveraging, bankruptcies, financial instability and bank runs. The fiat currency monetary system allows the main Reserve Banks to print currency to avoid a systemic collapse. They aim to print just enough to mitigate the deflationary forces. Central Banks use MMT to cover the growing hole of debt in the centre of major economies. They devalue currencies, and because all money is based on debt, they also devalue debt.

The point is – inflation is the difference between the “real value” that results from the deflationary forces, and the nominal value of stuff. The prices of shares, residential property, the food basket and wages would have been 30% of what it currently is if the deflationary forces were allowed to play out unrestricted. The devaluation of money, the printing of currency or MMT simply hides the real picture.

Therefore, in reality, the difference between the crash-scenario price (70% lower than current values) and the current nominal price is the actual inflation.

Agreed, to a further extent inflation is predominately felt amongst the poor to medium income groups.

It is one to the reasons why I refer to a the cost of a slave.

Freedom and Rights can only be enjoyed if the person has Economic Means equal to the cost of a slave.

Inflation is never a good thing. If the economists or the text books say it is, they are wrong. Read Jeff Booth’s book The Price of tomorrow.

Thanks i will get it.

Another good book is:
The Goverment Against the Economy by George Reisman.

This book might be 50 years old by the information it contains is relevant to today’s problems and how a free market system should be implemented to ensure progress of human society.

There is a big difference in potential global inflation where central banks have deflated the currency …and this place! We are terribly vulnerable to a huge depreciation in the ZAR when we reach the fiscal cliff. That in itself could drive interest rates up (long term capital markets) and with the ZAR down this results in a colossal increase in the cost of imported items.

Our distribution costs in this country are shocking-but worst is the totally unsustainable government wage bill (as well as failed SOEs and 18 million basic income grants) inflating the cost of everything….simply to buy votes for the ANCs ever diminishing pool of purchased voters.

Don’t forget the cost of +100 welfare programs. Free schooling, Free electricity, Free water, Free Health Care, Free.

In the U.S. 16% of adults are on welfare costing the Goverment in excess of $1 Trillion and I’m sure that in South Africa the cost of all the Freebies would add a higher percentage of adults.

Economic theory says that when more money is pumped into an economy, inflation must go up. But it’s not. Why? Because of two reasons; the economy is manipulated to the extent that nothing that’s supposed to happen, happens. Secondly, due to constipation. For inflation to go up, the money must somehow filter through the system to get into the hands of the people. When they have more disposable income, prices will go up. But we all know that is also not happening. QE, bailouts or loans that governments create, goes straight to banks, big business and their own governmental machinery. It doesn’t reach the man in the street and inflation, therefore, cannot happen. This is exacerbated by the fact that the filthy rich and big business sits on the money and governments, across the world, wastes the money on non-productive means. The end result is that the rich gets richer and the rest is trapped in a dismal space. Be warned that they will try to get the ‘money’ in your hands via loans, which will cement your servitude to them for ever. We, who used to be players in the market, have lost just about all clout. We are the little ants who dodge around, trying to stay away from the elephants fighting above our heads for access to money. In a strange way, the decline in disposable income for the man in the street, over time, also protects us from rampant inflation. So, my advice; embrace your pitiful salary as the only way left for you to hold up a defiant middle finger to the fat cats intent on screwing you over with their sick little plans. Let them try to inflate themselves into untold riches, when there is nothing to inflate. With meat already earmarked for inflation this Christmas season, that is the opportunity you have to lift that defiant middle finger.

End of comments.





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