How to invest if central banks can't control inflation

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How to invest if central banks can't control inflation
Central banks may not be able to control inflation as they intend. (Cottonbro/Pexels)

The gap between what financial professionals and consumers think about inflation is growing, but the reality is that the "wider picture" is being ignored.

The consequence for investors will be that only a very narrow range of income investments will perform well, according to Bruce Stout, who runs the £1.8bn Murray International investment trust.

In the latest factsheet for the trust, Stout wrote that markets and policy markers are “ignoring” the “wider picture” which is that inflation will be higher than most investors have previously experienced, even if it falls from here.

Stout wrote: “As the financial world obsesses about predicting ‘peaks’ in inflation and interest rates, it seems very few are prepared to consider the wider picture. 

The vandalism that was quantitative easing proved an opium for asset prices.Bruce Stout

"For an investment generation unfamiliar with inflation, the compulsion to firmly hang onto the belief in a swift return to the ‘2per cent mean’ of the past decade remains all-consuming."

He said such delusion is not confined to just financial markets and investors either, since practically every discredited central bank in the developed world is currently peddling this unrealistic message of 'returning to the 2 per cent trend'.

The most recent forecast from the UK’s Office for Budget Responsibility predicted that UK inflation, currently over 10 per cent, would fall to 2.7 per cent.

In contrast he feels that in the world outside of financial markets, rising rents, mortgage rates and index -inked prices mean the mindset of consumers now differs from that of investors, as they have become used to inflation as a phenomenon for the first time.  

Beginning and ending the inflationary spiral

Stout believes that where this conflict will be played out is in the labour market.

Workers, scarred by the current impact of high inflation, will be more aggressive in their wage demands, meaning future inflationary pressures will be greater, regardless of central bank actions.

However, he feels markets are ignoring this and trusting central bankers.

Stout also believes central bank quantitative easing policies began the inflationary spiral, and believe that reversing QE will reverse the spiral, but the change in consumer mindset means the die has been cast, and questions and forecasts around the short-term trajectory are not relevant. 

Such naïve monetary policy is no longer sustainable under evolving economic circumstances.Bruce Stout

Quantitative easing is a central bank policy to expand the quantity of money in an economy, and policy makers use higher interest rates and quantitative tightening to reduce the money supply in what they hope is an orderly manner and at a pace which doesn’t tip economies into a deep recession.