Dear PGM Blog reader,
In this weekend blog article, we want to take the opportunity to discuss the latest figures regarding the rise of the global inflation figures and the best way to hedge against it.
INTRODUCTION:
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money.
INFLATION CPI:
Inflation measured by consumer price index (CPI) is defined as the change in the prices of a basket of goods and services that are typically purchased by specific groups of households.
A consumer price index is estimated as a series of summary measures of the period-to-period proportional change in the prices of a fixed set of consumer goods and services of constant quantity and characteristics, acquired, used or paid for by the reference population.
Below chart from OECD shows the total annual CPI in the period from January 2017 up to December 2017, per OECD country.
CORE INFLATION:
Core inflation represents the long run trend in the price level. In measuring long run inflation, transitory price changes should be excluded. One way of accomplishing this is by excluding items frequently subject to volatile prices, like food and energy.
PRODUCER PRICE INDICES (PPI):
Producer price indices (PPI) measure the rate of change in prices of products sold as they leave the producer, they exclude any taxes, transport and trade margins that the purchaser may have to pay.
The PPI measure price change from the perspective of the seller and differs from other indexes, such as the Consumer Price Index, that measure price change from the purchaser’s perspective.
The PPI looks at three areas of production: industry-based, commodity-based and commodity-based final demand-intermediate demand.
Below chart from OECD shows the total annual PPI in the period from January 2011 up to December 2017, per OECD country.
USA CPI REPORT JANUARY 12, 2018:
On Friday, January 12, the USA Bureau of Labor Statistics, reported that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in December 2017 on a seasonally adjusted basis.
Over the last 12 months, the all items index rose 2.1 percent before seasonal adjustment.
The index for all items less food and energy increased 0.3 percent in December, its largest increase since January 2017.
The food index rose 1.6 percent over the past year; the index for energy increased 6.9 percent, with all of its major component indexes rising during 2017.
Below chart shows a breakdown of the inflation figures in the USA in 2017.
PGM CAPITAL ANALYSIS & COMMENTS:
Inflation Forecast:
Inflation forecast is measured in terms of the consumer price index (CPI) or harmonized index of consumer prices (HICP) for euro area countries.
Below chart shows the Inflation forecast for 2018 by OECD. Projections are based on an assessment of the economic climate in individual countries and the world economy, using a combination of model-based analyses and expert judgement.
In below video, Mihir Worah, CIO Asset Allocation and Real Return, explains the micro and macro factors underpinning PIMCO’s inflation forecast along with implications for investors.
USA Inflation Forecast:
The US dollar in 2017, has had its worst year in more than a decade, and we believe that 2018 will bring more of the same.
Early in 2017, US President, Donald Trump was worried the dollar was getting too strong. At the start of 2018, he has nothing to worry about.
In 2017, the US dollar recorded an annual decline for the first time in five years.
As can be seen from below chart, the US dollar index, which measures the dollar against a basket of six other currencies, fell nearly 10% in 2017, which is the biggest annual decline since 2003.
A declining US-Dollar will put an upward pressure on commodities, with a leverage on the price of consumer goods and (processed) food.
Gold will also perform well, under a rising inflation, but investors should be careful, because policy makers will do their utmost trying to control the price of gold via monetary policies.
Due to this believe that shares of conglomerates which produced consumer disposal and processed food, will outperform Gold in the longer term as can be seen from below chart, which shows measured in US-Dollar the performance of the shares of Nestle (NYSE: NSRGY), Reckitt Benckiser Group plc (NYSE: RBGPF), Unilever (NYSE: UN), Johnson & Johnson (NYSE: JNJ) and Gold (GLD), over the last 12 years.
Above chart proves, that a basket of the shares of the above mentioned conglomerates and Gold might be a good hedge against inflation.
When viewing above chart, please keep in mind that those conglomerates, pay an annual dividend of approx. 3 procent which is not included in their respective stock price appreciation chart.
This means that investing in world biggest consumer conglomerates is much more attractive over longterm than investing in Gold.
Interest rates:
Inflation and interest rates are often mentioned in the same breath, and this is because the two are closely related.
Central Banks, usually increase interest rates when inflation is predicted to rise above their inflation target.
Below chart shows the effect of higher interest rates on the economy.
In the current world in which countries and (most) individuals are up to their eyeballs into debt, rising interest rates will be that it will not only increase the interest payments on these debt, but will also increase these debts if the interest payments are accrued to the debt. Increasing interest rate will also have a negative effect on bonds, which will have a negative effect on social securities- and pension funds, which have most of their asset invested in real-estate and debt securities.
Based on this rising inflation and subsequently increase of interest rates, might lead to stagflation.
We of PGM Capital, your trusted Investment Advisor, are at your service, as the captain of your nest egg, with our best advice for you to protect your self against the dilution of your purchasing power and for you to increase your wealth higher than the inflation rate .
Last but not least, before taking any investment decision, always take your investment horizon and risk tolerance into consideration and keep in mind that share prices don’t move in a straight line and that Past Performance Is Not Indicative Of Future Results.
Yours sincerely,
Eric Panneflek