Inflation is a worry

As many readers will know, MitonOptimal are our preferred fund house. Their common sense approach beats all others as far as we are concerned. For example, their strategic inflation forecasts are based on the long term Kondratieff inflation / deflation / disinflation cycles. The developed world has been in the disinflationary and deflationary cycle since 1980 and is about to change to a vastly different long inflationary period. Most Emerging Markets are earlier in this cycle with some Asian countries ahead of the process.

MitonOptimal went out into the market to find what the experts thought. This is what they found, “With growth barely managing to keep pace with trend, underlying inflation should remain modest this year,” Michael Hanson, an economist at Bank of America Corp. in New York, said in a research note to clients. “The main risk to the inflation forecast remains a sharp increase in oil prices.”

Anatole Kolesky from Gavekal Research, however, is of the view that inflation is here and has said the following: “Inflation is now clearly above the Fed’s newly-announced 2% target and is heading higher, yet this seems to cause no concern among investors. Instead they prefer Bernanke’s standard reassurance, repeated recently: “As always, we have to look at inflation and be comfortable that price stability will be maintained and that inflation will be low and stable.” But the fact is that inflation has already moved out of the “low and stable” range, as currently defined by most central bankers - and this is true in the Eurozone and Britain, as well as the US.”(See graph).

The Fed said after last Spring’s policy meeting that the jump in energy costs will probably be short-lived. “The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate,” the Federal Open Market Committee said in the minutes of its March 13 meeting.

RMB Asset Management Research Unit reports that under a worst case scenario, they forecast that the oil price will jump to a high of US$170/bbl if tensions escalate into an armed conflict. Depending on the length of this conflict, the economic damage caused by high oil prices would be extensive. Inflation would increase, disposable income would be driven lower and weigh on confidence. Given the fragile state of the economy, it may tip the globe into recession.

MitonOptimal has concluded that no one knows what the short term future holds - especially when politicians are in the mix! - However it is imperative to follow the price trend in oil (and food) to protect our portfolios against potential inflation shocks and benefit from the pricing power certain stocks hold in these sectors. But equally important to note, is that the developed world is trying to reflate whilst the emerging world is still fighting the evil of inflationary pressures. These are very different asset class environments and need to be played carefully if money is to be made.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]