Inflation in December 2020 doubled to 0.6%pa from November’s 0.3%pa.
Bank of England base interest rates are currently just 0.1%pa with consultation papers circulating on the impact of the Bank of England going negative for interest rates. All of this means investors are earning little or nothing in interest on their bank accounts.
This means if your interest rate is below the inflation rate, you are losing money i.e. the value of your money is devaluing.
Central banks have already offered signals that they plan to keep interest rates low and let inflation grow. On top of this, the costs of goods imported from the EU may now be attracting additional import duties and VAT. This means inflation is likely go even higher.
We also believe that governments plan to let inflation grow to devalue public sector debt without ever repaying it. We have suggested many times that an inflation rate of 5%pa compounded over 10 years is an increase in prices of 62%. This means that if countries has sustained inflation over a period, national debt will be devalued without ever repaying it.
From all of this, we conclude that inflation is coming, interest rates will remain low and cash savers will lose money unless they diverge into stock market related investments.
The argument for market related investments looks more compelling when you add not just inflation driving markets higher but also we are expecting huge central bank stimulus in the £trillions across the globe as countries wrestle with kick starting the economy after the pandemic is brought under control. Stock markets are likely to hit many new highs over the coming decade.
If you hold cash investments, consider market related investments. If you are an experienced or risk averse investor, invest just a small proportion of your money in markets to gain experience.
Contact us for investment advice.