What's the story with inflation

Wednesday, August 25, 2021

Video Transcript

Scott: Welcome to the IMFG Investment Update. My name is Scott Douglas. I'm a director at IMFG. Today, I'm here to talk about inflation. Inflation has been a big topic at the moment and I have with me Dr. Steve Garth. Steve sits on our investment committee and is gonna share with you some insights. Steve what, what what's going on with inflation? It's been very popular in the media lately.

Steve: Yeah, that's right Scott, it has. The media, every day, has had a different story about inflation. And there's no question that prices have risen quite a lot in a short period of time. And of course the media are onto this about, look, is inflation going to be really high in the future or will inflation just remain low as it has been?

Scott: So, Steve, what does it all mean? Is inflation good or bad?

Steve: Yeah. So, Scott, as you know, inflation is about the increase in prices over time. And in fact, inflation can be both good or it can be bad. It can be good if inflation increases but modestly. It means if people know that prices are rising, they'll tend to spend earlier and that helps the economy. However, if inflation runs really high, then typically interest rates will rise and then the cost of borrowing becomes higher and that can have quite negative effects on the economy.

Scott: So, Steve, what is inflation gonna look like in the future? Is it gonna be higher or lower?

Steve: Yeah, so the market have been looking at inflation and particularly in the first quarter of this year, Scott, the market thought that inflation was gonna be much higher than what people had originally thought it would be, even taking into account the pandemic. But the Reserve Bank of Australia and other central banks have said, "Wait a minute, these high prices that we're seeing at the moment, they're sort of due to the bottlenecks being caused by COVID." And once we get the vaccines out and we all return to some level of normalcy, that in fact supply and demand will even out and inflation, even though it'd be higher than it is now, it'll just be quite modest. So, the Feds have used the term "transitory," that the high inflation prices at the moment are transitory.

Scott: So, Steve, what have the experts predicted about inflation?

Steve: Yeah, Scott look, one way to look at this is by looking at 10-year bond yields. Now, normally they're about the most interesting part of the financial market, a bond yield. But you can see in the chart here that, in the first quarter, those 10-year yields went from quite low and they've suddenly spiked up. And, again, that's the market thinking that future inflation is gonna be much higher than what they thought in the past. But, if you now look at this quarter, you can see those bond yields coming back down. And so that's the market reassessing what they think future inflation will be. And now the market has, sort of, fallen into line with the RBA's view that, yes, inflation will be higher, but it will be within the band that the RBA would like, which is 2%, 2.5%.

Scott: Steve. So, how good is the market actually at making those predictions and how accurate are they? Can they really see where it's headed?

Steve: Yeah, well, you know Scott, making predictions is really hard, particularly about the future. So all the market can do is pricing all the information they know now. And that's got us [inaudible 00:03:26] prices, both bond yields and stock market prices move every day, because the market's always taking into account new information.

Scott: So, Steve, what would be the best hedge against inflation for investors?

Steve: You know, Scott, the market would try to sell you all sorts of things as hedges against inflation. But you know what the best hedge against inflation is, it's actually just having a diversified investment in stocks and bonds. If you look at the chart here, you can see that the stock market returned more in Australia, you know, 9% to 10% per annum, much higher than the inflation rate. And even the bond market has returned 5% or 6% per annum over the long run. So, if you want to beat inflation, the best thing to do is have a diversified investment in stocks and bonds and talk to your financial advisor about the right mix of stocks and bonds to meet your goals.

Scott: Well, thanks very much Steve. That's been great. And we really appreciate you providing those insights and look forward to talking to you next time.

Steve: Terrific. Thanks, Scott.

Scott: Thank you.

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