Investors should prepare for inflation rise

Investors should prepare for inflation rise

Advisers should prepare clients for higher inflation across the world due to economic events in China, David Jane, who manages £960m across a range of multi-asset funds at Miton, has said.

Mr Jane said a reason for the relatively low inflation experienced in recent years has been the result of businesses relocating manufacturing to China, where wage costs were lower, which meant the cost of many goods exported from China was cheaper than the cost of goods manufactured elsewhere, pushing down inflation for consumers.

But Mr Jane noted that wages have started to rise in China, meaning the country will no longer be able to effectively export low inflation to the rest of the world.

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He said many companies have already moved production away from China to neighbouring countries, but he added "there simply isn’t the population in the rest of the world to move the production to other countries to the extent of making up for rising wages in China."

The second reason Mr Jane thinks the world is set for higher inflation is the action of central banks.

Mr Jane said: "From the 1970s onwards, central bankers viewed it as their main purpose to control inflation, particularly after the oil crisis of the 70s.

"And they succeeded in doing that, but now inflation is persistently below target they are starting to view it as their main purpose to get inflation to rise. This means they are running pro-inflation policies, and so I expect them to succeed in that, and inflation to rise."

Peter Elston, chief investment officer at Seneca, said most major economies are growing at a faster rate than is the long-term potential of those economies, which should mean inflation rises above central bank target levels, and central banks will then raise interest rates to keep inflation lower.

Seema Shah, global investment strategist at Principal Global Investors, said the current policy of the United States of levying tariffs on Chinese goods and vice versa, is also likely to lead to higher inflation.

This is because goods imported into the US from China will be more expensive, creating inflation in the world’s largest economy. This might be expected to push wages up in the US, creating inflation in much of the rest of the world.

Fund manager Neil Woodford, who runs the £6bn Woodford Equity Income fund, said he expects the excessive debt levels in the Chinese economy to cause an economic decline in that country, which will effectively export deflation around the world.

Jonathan Davis, who runs Jonathan Davis Wealth Management in Hertford, said that while deflation leads to a better quality of life for many people, governments tend to want inflation as it erodes the cost of national debts and so he expects inflation to rise.

Both Mr Davis and Mr Jane have invested in hard assets as they believe those offer protection from inflation.