The Bank of England’s Monetary Policy Committee has raised the spectre of inflation. The question could be; what took it so long?
Inflation is already quite high. The Bank of England has breached their inflation limits already. It doesn’t feel like it because many people are losing jobs and those who aren’t, and who aren’t in the private sector, are either having to accept pay freezes or are even seeing pay cuts as firms rebuild their profitability. It doesn’t feel like inflation.
Inflation isn’t just a rise in prices (however poorly noticed) it is also a rise in the money supply. And this has gone through the roof. QE, or Quantitative Easing, may be coming to an end but it has led to a massive expansion in the amount of money on bank’s books. And where has this newly printed money gone? Mostly it has gone to the government bond market.
The money is tied up as firms and consumers don’t want to spend it (the government is a different matter). It is like denying that there is a lake behind the dam as there is only a trickle in front of it. The trickle is no evidence of the health of the dam itself.
Inflation only needs a spark, and if Labour gets re-elected (or the Conservatives don’t have a solid majority) there will be no political will to deal with inflation.
So what should an investor do if inflation is coming along? Here are a few modest suggestions:
- Short currencies, particularly the pound
- Short fixed interest securities, these are currencies by another name if inflation comes along
- Go long on commodities, particularly gold (yes, gold)
Beware of property and shares, yes they should go up in inflation but they already have a large increase in revenue priced in