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Inflatie is gezaaid, maar onzeker is wanneer het uit de grond schiet

16-10-2012 | Visie | Lukas Daalder Het gonst van de speculaties over dreigende inflatie. "Er zijn zaden in de grond gestopt die kunnen uitgroeien tot inflatie. Maar niemand weet wanneer de eerste kiemen zichtbaar worden. We bevinden ons in ongekende tijden," zegt Lukas Daalder, portefeuillemanager bij Robeco, in een interview.

(Dit is een Engelstalig artikel)
 
eurozone     united states     emerging markets
Inflation Monitor (source: Robeco)

The fear of inflation is apparent, for example, from the increase in demand for investments that offer protection against inflation and rise in gold price to USD 1,775 per troy ounce in October. Cash injections from central banks have exacerbated these worries. Central bankers are pumping billions into the economy on the assumption that the ailing economy and the fragile banking system are more urgent problems than inflation.

Question: The enormous levels of public debt are considered to be creating the impetus to use inflation as a tool to reduce this burden. Under how much pressure are the central banks to ‘inflate away’ this immense amount of public debt?
Answer: Most central banks in the world are independent and there is no immediate necessity to ‘inflate away’ government debt. Strictly speaking, that is a problem for governments to resolve.
Of course, it does play a role indirectly. Much research shows that high debt levels slow economic growth - because governments have to cut costs, or raise taxes - and growth then often does become an issue for many central banks. One good example is the policy of the US Federal Reserve Bank (FED), which has already indicated that it will not raise interest rates until mid-2015. That is resulting in the ever-present threat of inflation.

Question: Is inflation a sensible way to solve the debt problem?
Answer: Opinion is divided on this. At first glance, it seems to offer an easy way out. But this comes at a cost. There are winners and losers. Parties that have debts (which are governments and mortgage holders) benefit, while, on balance, the parties on the other side of these debts (those who have purchased government debt or have issued mortgages) are the losers. Simply put, governments benefit by placing the burden on savers. In the Netherlands the biggest savers are the pension funds, so this ultimately affects everyone.

Question: Should we worry about savings deposits?
Answer: Yes, but not now. Economists generally believe that cash injections will eventually lead to inflation. This applies in 'normal' circumstances, but what we are now experiencing cannot really be classed as normal. We are currently treading uncharted territory.

Question: So economists say cash injections lead to inflation - but do we know when?
Answer: A frequently cited example in this case is Japan, a country that has been trying to rekindle its economy since the early ‘90s. Despite various measures including cash injections, this has been unsuccessful. The country is still wrestling with negative inflation (deflation) and there is no sign whatsoever of inflation. It is important to establish that inflation does not just happen; if there is competition, and capacity that isn’t fully utilized or with high unemployment - as is currently the case in many places in the world - companies will certainly be in no hurry to raise prices. There will be no real threat of a wage/price spiral until the corporate sector is operating at full capacity.

Question: What can investors do to ensure that their savings do not decline in value?
Answer: Clearly, there are customized products that offer protection against inflation, but they are a) quite expensive and b) often not appropriate for retail investors. On the face of it, so-called inflation-linked bonds are suitable, but it is important to note that most are linked to the European inflation index. In a situation where the Netherlands and Germany have 3% inflation and in southern Europe 3% deflation, investors will receive little compensation, while still having to pay prices at the supermarket that are 3% higher.

Popular alternatives are commodities, gold and real estate. But these investments are not just dependent on inflation - a war in the Middle East will also affect how they perform. In the past, British investors have tended to protect themselves from the effects of inflation by investing more in equities, given that profits rise together with inflation. An additional advantage is that the risk premium on equities is currently at an attractively high level.

Robeco’s Inflation Monitor is designed to show whether inflation pressures are on the rise, thus indicating whether the risk of future inflation is increasing. The Monitor’s forecasts come in the form of z-scores* that indicate how current inflation-linked data—on the economy, monetary developments, commodities and inflation expectations—should be regarded in the context of the latest business cycle.

Based on the assumption that the past ten years are a reliable proxy for a normal cycle, a stable z-score of zero would indicate that price pressures are currently in line with the average over the most recent business cycle.

*Z-score = (most recent observation – ten-year average) / average standard deviation of monthly data
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