The festive season is shaping up to be an expensive one. Prices are rising just about everywhere, and on everything. Wages are trying to keep up, but inflation moves fast – and probably faster than your employer. As consumers feel the pinch, can investors do anything to stave off the bitter chill of inflation? Thomas Hardy, Investment Manager at Ruffer, answers key inflation questions.
“Scrooges! They’re always fretting about something, that lot at Ruffer. Either fiat currency is doomed, stock markets are about to crash or we’re headed for a new Cold War.”
I’ll admit it, most of our investment commentary doesn’t exactly have a Richard Curtis feel good factor about it. Let me explain why.
Core to our investment approach, is the constant hunt for the major threats to our clients’ money – the big picture risks which loom just beyond the horizon. By identifying these risks, and defending against them, we aim to build a portfolio of assets that can make money whatever the weather.
This time around, it’s inflation.
It’s how much?
The US Consumer Price Index (CPI) – which measures the weighted average of prices of a basket of consumer goods and services – has soared to 6.2%, its highest point in more than three decades. The equivalent UK basket, at 4.2%, is at its most expensive in 10 yearsThe US Consumer Price Index (CPI) – which measures the weighted average of prices of a basket of consumer goods and services – has soared to 6.2%, its highest point in more than three decades.i The equivalent UK basket, at 4.2%, is at its most expensive in 10 yearsii. Demand for food, fuel and furniture has outstripped supply – and retailers have pushed prices up accordingly. There are some notable exceptions to the trend of rising prices – solar panels, wind farms and hydrogen power stations, apparently, are getting cheaper. Great news for the climate, but wind turbines are notoriously tricky to fit into a stocking.
i Labor Department
ii Office for National Statistics
Ghost of Christmas past
Commentators have been quick to draw comparisons between the high inflation we’re seeing today and that of the 1970s. Inconveniently, however, there are some key differencesWhen Britain’s coal miners ended their 1972 strike by accepting a pay increase of 35%, roughly half of the workforce was unionised. That has now fallen to less than a quarteriv. And with balance sheets scorched by the pandemic, wage increases of the magnitude we saw in the 1970s look decidedly doubtful. So, we shouldn’t expect the ghost of Christmas past and the double-digit inflation that came with it. But the ghost of Christmas present delivers bad news nonetheless – inflation has bedded in, and wages are yet to pick up. If your shopping this year feels expensive, it’s because it is.
iv National Statistics DBEIS (Department for Business, Energy & Industrial Strategy)
Reining it in
What of the inflation refuseniks – those who consider the current spike in inflation temporary? Perhaps they are shunning physical gifts this year and buying John Lewis vouchers for their loved ones instead: To my darling, Don’t rush out to spend this – everything will be cheaper in a few months!
Inflation has lasted longer, and risen higher, than many people expected (not least central bankers). That said, we are likely to see inflation data dip in the middle of next year when figures are compared with those we saw when we emerged from lockdown.
Indeed, we aren’t predicting a linear and uninterrupted rise in prices.
Inflation has lasted longer, and risen higher, than many people expected (not least central bankers). That said, we are likely to see inflation data dip in the middle of next year when figures are compared with those we saw when we emerged from lockdown
We expect the hallmark of the next economic environment to be high inflation volatility – that’s the real headache for both investors and policymakers.
Central banks are in a quandary when it comes to inflation. They are both the weather forecasters, and the weather itself. To bring inflationary forces under control without taking the wind out of the sails of the economy will require a flawless run of policy decisions.
Inflation is a problem for governments too – increases to the cost of living isn’t exactly a vote winner, but neither is a tight fiscal purse. We are in a new era of fiscal expansion, an age of public spending. Who would dare be the first to put a nation back onto the path to deficit control and (whisper it) austerity?
A miracle required?
In a world of inflation volatility, both conventional bonds and equities are vulnerable. Asset allocators will need to be agile and creative. Unconventional assets will be necessary to weather the storm at different times, and these come with a price tag.
At Ruffer we are unconstrained, unbenchmarked and active investment managers. This allows us to build a portfolio which looks quite different to most, but one we hope will see our clients through this bleak mid-winter, and many more to come.
In a world of inflation volatility, both conventional bonds and equities are vulnerable. Asset allocators will need to be agile and creative. Unconventional assets will be necessary to weather the storm at different times, and these come with a price tag
In Lady Windermere’s Fan, Lord Darlington describes a cynic as someone who knows the price of everything and the value of nothing.
We will certainly be keeping a beady eye on prices in the months ahead. Certainly, Holly won’t bemoan that our extended family spread may be furnished with fewer of those expensively imported Brussel sprouts…
But when it comes to knowing of the value of things – we aren’t really cynics at all. We will continue to worry about the major risks out there because we know our clients have better things to be thinking about than their investment portfolios this Christmas.
Ruffer LLP 2021. 80 Victoria Street, London SW1E 5JL. The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered.
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