The outlook for inflation

This article is part of
Guide to defensive multi-asset investing

David Coombs, multi-asset investor at Rathbones Unit Trust Management says: “It is certainly plausible that if the recession is quite brief we end up with hyper inflation in the economy, but that is not our base case.

"Our base case is that this won’t happen, because unemployment is likely to rise sharply, and that will stop wages from rising for a while, and in such a scenario it is difficult to see inflation getting very high.”    

Mr Flood says central banks have adopted a view that they will pursue growth and be less concerned about inflation, a scenario he says happened in the world in the early 1970s, and subsequently inflation became very high.

Importance of the oil price

But Ms Nunez says a major factor will be the direction of the oil price, which has hit record lows in recent times.

As oil is used to manufacture and transport goods, it is a major cost in terms of bringing goods to market and so a major contributor to inflation.

Mr Coop says the policy measures announced so far are designed to “prevent deflation”, and “if the government is effective then it will be able to stop inflation getting very high later on.” 

He adds that if higher government spending and low interest rates would in normal circumstances lead to higher inflation, “there are also powerful and long-term deflationary pressures in the world, caused by technology and ageing populations, and those are only going to get stronger, and could stop inflation getting very high.” 

Ms Nunez says: “It is hard to see how inflation could spike if the oil price doesn’t rise.”               

Nick Watson, a multi-asset investor at Janus Henderson believes inflation will rise from here, and says in such a climate investors need to avoid many of the traditional defensive assets, and instead focus on assets that perform well as economic growth picks up, these include some equities, and means avoiding bonds. 

Charlie Morris, chief investment officer at Atlantic House Investments, believes gold is an asset to own when inflation is rising. He says: “Gold is an asset that doesn’t work in a portfolio most of the time, but sharply higher inflation is one of the occasions when it does offer protection.” 

Mr Flood says there are some assets, such as infrastructure products, which have fallen in value in recent weeks as a result of the general market sell-off, a lot of passive funds were forced to sell them because they had fallen in value, and we think those assets are now attractively valued.”