Inflation

makfli

A number of commentators are predicting very high inflation on the horizon. Looking for advice on sensible investments assuming that this scenario will happen.
Dont want high risk and dont think gold is for me.
Thanks

Highly Salami

I dont understand how we can get inflation in the future.
The US Fed. and ECB have used 'quantitive easing' and ultra low interest rates to flood their economies with money and instead we have had some deflation!
Now both these institutions are going to end easing (ECB in March) and will probably raise interest rates soon after. This would surely cause more deflation, no?

dunkamania

maybe but the thing bout inflation is that by the time you realise you have it, its very difficult to get rid off it

Noel 006

This is a tricky one. My take for what it's worth is that we will not see significant inflation in the coming years if we see inflation at all. Some will describe Quantitive easing as inflation, ie, increasing the amount of the money supply therefore we should see the effects of inflation in the prices we pay for goods and services. Straight forward enough so far. However when you condsider that money is made up of two things, cash & credit, then this argument gets turned around a bit. As the credit side of money is far larger then the cash in circulation, and this has contracted to a greater degree than the cash being printed we have entered a period of deflation, ie a reduction in the money supply in circulation. Added to the fact that the central banks appear to have printed this money for the banks to rebuild their balance sheets and not for circulation in the economies at large then deflation may hang around for a bit. Then again I am not an economist, who knows? Makfli. if we start to see inflation then look at commodities priced in dollars if you don't like gold, but I wouldn't be making any investments at the moment based on an inflation play. Do it based on a demand/ supply imbalance and nothing else.

makfli

I agree its difficult to see inflation picking up given that the consumer is starved of credit.
Apart from supply/demand commodity pricing seems to be linked to USD value. Viz a weakening dollar results in upward pressure on commodity prices ? Thus if US interest rates creep upwards to control inflation this will result in a stronger dollar unless the other major currencies strengthen as well. Does this make sense?
Is there anything in government (euroland) bonds that would make sense ?

Noel 006

I understand what you are getting at and it makes sense to a degree. The problem is that everyting works until it doesn't! If the dollar starts to seriously weaken due to oversupply/ hyper inflation then I am not sure that by raising interest rates it will make a huge difference. I have a feeling that this recession is only getting started and that the rally since March is just a bear market rally. During the previous drop in the markets there was a flight to the Dollar for safety, I am not convinced that will happen again if/when we see another downturn. The problem for me with this is that there are so many factors that it is nearly impossible to guess what is going to happen, you could factor all these events, short a commodity like wheat, then see a huge crop failure and boom, curtains! I don't position trade, I look for short term supply/ demand imbalances and work off that, trying to figure out what governments and central banks will do doesn't really come in to play, only on the day of announcements. In regard to bonds, I trade the Eurobond ( FGBL), if you are considering this for a longer term play wait till you think they will raise interest rates and consider shorting them when you see them at a supply area, ( same for US bonds, 10year note, don't trade 30 year bond ). Thats just me though, it's important to do your homework, if you just trade off advice from Boards you will probably loose you jocks!

AARRRGH

We will definitely see inflation.

Less demand means less production. Less production means rising prices.

Also, with central banks currently printing money, it is only a matter of time before they decide they want that money back, so they will increase interest rates. High interest rates means less money in circulation which means less demand which means less production which means rising prices...

You always see deflation in the short term and inflation in the medium to long term after a recession.

Noel 006

Ok AARRRGH, I take your point and like I said I am not an economist but let me try to argue some of your points. If nothing else it at least gets my brain working!!

Point 1. Less demand means less production. Less production means rising prices. - Take (1) the property market, demand very low, production even lower still. Rising prices??? (2) Motor Industry - Demand in the gutter, production facilities running at probably 50% capacity. Rising prices????

Point 2. High Interest rates generally leads to increase in personal savings. High rates of savings leads to a slow down in the circulation of money. A slowdown in the circulation leads to lower prices, which is a symptom of deflation.

Point 3. You always see deflation in the short term and inflation in the medium to long term after a recession. Perhaps you are right about this, I genuinely do not know, but what I do think is that this recession is only getting started and will last for a lot longer than people think. So maybe eventually we will see inflation after the recession/ depression, but when will that be? My guess, not before 2013/14!