Investors should relax about inflation


Inflation concerns should not make investors fret as the UK is on course for lower rates ahead, the head of asset allocation and research from Rathbones has said.

Ed Smith told FTAdviser the peaks in inflation seen in October would not last long; according to Rathbones's modelling. By the end of March 2018, he expects inflation to be lower, back down to 2.5 per cent. 

"I would not fret because what has caused inflation to get up to 3 per cent will not last long, and that is certainly what the Bank of England has been saying."

Moreover, he said while going back over the past 50 years, 3 per cent looks low as an average of inflation, there is a wider picture here. Mr Smith explained: "If one takes 300 to 400 years' worth of inflation data, actually the anomaly was the 1960s, 1970s and 1980s. In the 19th Century it averaged at zero. 

"Maybe that's a more normal scenario", he said, adding: "Maybe with technological changes, and with the next phase of demographics, maybe central banks will in fact struggle to reach their inflation targets, and maybe it is set to be quite low."

Responding to questions of whether monetary policy has been driving and manipulation, Mr Smith said: "Quantitative Easing (QE) is a tool of monetary policy, and the tightening or loosening of monetary policy in the name of achieving the central bank's 2 per cent target is only going to have a temporary effect on inflation, and not in the long-term."

While people are worried about the old adage 'inflation is always a monetary phenomenon', he said: "I'm not sure that's well enough understood. First of all it is not economic orthodoxy. The theory and equation it is based on does not hold true in real life. And this theory never meant that an increase in the monetary supply translates directly into higher inflation."

Moreover, Mr Smith believes globalisation has not had a downward effect on inflation, as some people had assumed. 

"Yes, clearly it has decreased the prices of TVs, iPads and t-shirts, and brought millions of people into the global workforce and put downward pressure on wage inflation", he said.

"But there have been offsetting effects to lift inflation up. For example, we have not picketed the savings from cheaper TVs or T-shirtsl wwe have gone out and spent those savings  elsewhere, putting up prices elsewhere.

"And in the emerging markets there has been a growing middle class who spend on the same goods and services we do in the WEst which again puts up the pressure on prices. 

"Finally, we all know what Chinese growth has done to commodity prices and energy prices, which is a big part of the inflation basket. This has generally gone up."