Last week, the stock market was largely driven (amongst many other obvious factors) by the expectations of Wednesday’s Federal Reserve update, and then the fallout from that update.
On one hand, they projected a 6.5% decline in GDP for the year. On the other, they re-affirmed their intention to keep interest rates at rock bottom in a bid to protect jobs and the real economy. Controlling high asset and stock prices were not high on their priority list. Additionally, along with other Central Banks around the world, they have essentially declared that they are prepared to print whatever it takes to keep the wheel spinning. If you’re reading this wondering why you should care about any of that, keep reading.
There is a very real risk of inflation becoming a major issue in the real economy. By that, I mean the recorded inflation figures could start to significantly outstrip the wage growth figures. If you haven’t worked it out yet, that means you will have less money in your pocket each month and with interest rates staying low for the foreseeable, any savings you have held in cash accounts will be dwindling in value at a rate of knots.
Why is there suddenly a high risk of increasing inflation? There is more than one reason that suggests this could be just around the corner. As previously mentioned, the central banks plan to keep printing money (which has come from zero economic output). This money must go somewhere, and once in the system it will start to dilute the value of the money in your bank account. In a perfect world, the capital distributed would be put to work at maximum efficiency and invested to create new businesses, jobs, goods and services at such a rate that there would be little or no inflationary side-effects. However, if these last few weeks have shown us anything, it is that we do not live in a perfect world.
As we look to the future, post-COVID and beyond, there will be a spotlight shone very intensely on the effects of globalisation and there’s a very real chance that the UK and other countries might take a few steps backwards. For years now we’ve been filling our homes with items ‘made in China’ – why? Because globalisation has given us access to cheap goods and products that maybe we didn’t need, but were available for a price we were willing to pay. The impact of de-globalisation could have its own price. This may be one we’re not so willing to pay, but will have no choice in the matter: it will push up prices.
This all doubles down on the already somewhat misleading current inflationary indexes used by the government. Take energy bills, for example: over the last five years, average household energy bills in the UK have gone up 22%1. Government inflation figures show an average annual increase of just 2.4%. I use the example of energy because, given its demand elasticity, it’s not so reactive to business cycles. This means that even in recessionary conditions, we would still be paying for the use of electricity.
With most people spending most of their week working from home or on furlough, there’s been a clear spike in interest in people’s own personal financial situation. This is positive, as it has led to many individuals and families making long-term decisions that will benefit themselves later in life. However, without proper guidance and advice, you may not be diversifying your wealth efficiently enough to protect against the future challenges we will no doubt face. If you want to put your hard-earned savings to work, you need to be thinking about diversification now. Your future self will thank you for it down the line, I can assure you.
Our expert financial planners understand the importance of securing your current and long-term financial wellbeing. If you want to know more about any of the topics mentioned above or to speak to a member of our team, don’t hesitate to get in touch on 0117 325 2224 or email email@example.com.
Published by Tim Brienza LLB (Hons) FPFS, Chartered Financial Planner at Brunel Wealth