Following the Finimize Podcast, we've outlined our CEO & Founder, Glenn Smith's, points on inflation.
Inflation has generally been under control since the '80's, but that does not mean it cannot come back. Any periods of inflation have been brief and transitory, there are concerns that might not be the case now.
Current reasons for inflation include:
These could be transitory, but there are increasing concerns they might not be. Increasing wage demands drives up costs of goods and is a reinforcing upwards spiral. Deglobalisation was highlighted as a factor in Covid and geo-political risks are keeping that impulse in place, which will drive up prices as good are more expensive to produce and there is less competition
So is inflation here to stay? Still hard to say, but keep an eye on the monthly inflation number both in the UK but also in the US and the EU.
So what are commodities? Materials we consume such as industrial metals, coffee, wheat, oats, soybeans, cotton, sugar, as well as precious metals like gold, silver and platinum. The list goes on.
Historically commodities have a tendency to appreciate when there is unexpected inflation. Vanguard just did a study of the last 40 years analysing relationships between unexpected inflation and commodities. It suggests that a 1% rise in inflation produces a 7-9% rise in commodities.
In comparison, equities have a less obvious response, they used to go down through the 80's and 90's in response to inflation shocks, but since the financial crisis which caused monetary stimulus through lower rates, the effect has been more muted and mildly positive, but not as strong as commodities.
To sum up, it's worth looking at commodities as a component in your portfolio.
So you don't want to buy a barn load of wheat as a private investor, it's not exactly easy to store. Financial instruments now make it easy to get exposures to commodities. As such I will outline 3 potential things that are worth considering now:
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