z advice
What goes down…?
Brian Tora of investment specialists JM Finn & Co warns inflation may not be far away
I
nflation is a tricky topic. Too much inflation is viewed as a bad thing. Too little – even worse. In other words, a
rise in the cost of living on a regular basis is an acceptable part – necessary, even – of maintaining a stable capitalist environment. The trouble is that inflation is notoriously difficult to keep under control. Or at least, that was the popular view until Western democracies embarked on the massive financial experiment that is concerted monetary easing. The inflation numbers that were published at the end of 2014 showed that the rise in the cost of living in the UK had declined to half of one per cent – the lowest rise since records began indicating that inflation appears to be evaporating. In
Brian Tora ponders a future rise in the cost of living
a way this is surprising, given the extent of monetary easing that has taken place in a number of major economies. Quantitative easing (QE) is little more than printing money and history tells us that when governments print money, a rise in the cost of living is sure to follow. Only it hasn’t on this occasion. So why is inflation so muted? Much has been made of the falling oil price and its effect on our cost of living. Certainly, cheaper energy costs have helped push inflation down, but a more relevant factor must be the absence of wage inflation. Indeed, it is considered that many are now
less well off in income terms than they were before the financial crisis and although unemployment is falling, there is still a sense that our economic recovery is insufficiently robust to warrant demanding higher wages and risking your job. In Europe, where the economic outlook is cloudy, falling inflation is even more of an issue. It has driven the European Central Bank (ECB) to embark on QE in an effort to stimulate growth and fend off deflation. This has driven down the euro which may help as a cheaper currency aids competitiveness, and can also push inflation up through dearer imported goods. Looking ahead, the imminent General Election could see the pound fall out of favour. Whoever wins will be under pressure to add further stimulus to the economy, possibly adding to inflation. And oil does appear to have stabilized. Anyway, the fall in price will drop out of the inflation calculation by the autumn. Inflation may not be an issue today, but do not be surprised if the cost of living starts to rise as 2016 approaches.
Brian Tora, Associate, JM Finn & Co
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