Economy and money tips: Inflation is back


ECONOMY MONEY The current increase in inflation does not bode well for the bond markets in the short term, given that interest rates will most probably increase too. The result should be that bond prices will drop. On the other hand, on the short end of the yield curve, opportunities may occur for large cash holders to increase their return in a rather safe way. However, if, as expected, inflation will stay subdued, bonds may recover later this year.

For stocks, the short-term effect of inflation may be positive. If money flows out of bonds, given that cash yields almost nil in interest, stocks with a good dividend, that are not too volatile, may get a boost, as well as the cyclicals. But if interest rates really increase and stay high, then the companies with high debt would see their margins being squeezed and thus their profit too. That should lead to lower share prices. Indeed, in such a scenario, cash would become a valuable part of an investment portfolio again given that both bonds and stocks would be under pressure.
Also, the housing market would suffer from higher interest rates if inflation increases. Real estate prices are softer when potential buyers must pay more for their mortgage and can borrow less for the same amount of monthly repayments on their loan. But that in turn is not good for economic growth because of the pressure of inflation.
The chances that a structural increase in inflation and interest rates might happen any time soon are very low today. We have seen a false start of a return to inflation before, in 2011, when economic growth, inflation and interest rates were rising, only to drop again after half a year.

In the current climate of fear of higher inflation, gold is gaining attention. But there prudence is required since the price of this precious metal may drop fast if inflation does not materialize itself solidly.

In conclusion, there is no alternative to a sound investment strategy of diversification of your assets and making investments in relation to your investor profile and investment horizon. Anything else is taking an unnecessary risk, with the notable exception of course of putting your money in your own company.