It’s a good headline grabber, isn’t it? No, it’s not a mistake. To explain the mathematics, I’m allowing for both negative deposit rates and a continuation of the higher inflation we’ve been experiencing in recent months. If we allow for the negative deposit rates and inflation of around 3% per annum, then in purchasing power terms, holdings in cash will lose 12% spending power over the next three years.
My father was not a financial expert, he was a civil engineer, but I remember in the mid-1970s when inflation was above 20% annually, he said that it was better to spend all one’s income immediately, as everything one was saving for would be so much more expensive the following year.
In fact, my parents borrowed as much as they could in 1974 to buy the best house they could afford, on the same logic – i.e. that house price inflation would way outstrip the mortgage costs.
Back to 2021, and the spike up in inflation as the world starts to recover from the COVID-driven recession is alarming. US ‘Urban Consumers’ inflation is now up to 5%+ (Source: Bloomberg). German inflation is at 3.4% and significantly above the Bundesbank’s 2% target, and it’s a similar story across Europe.
The great new word in financial markets and economics is ‘transitory”. The central bankers are all saying that the uptick in inflation is transitory, i.e. it will pass relatively quickly as it’s caused by just a few temporary supply bottlenecks and teething problems for employers to get staff in the post-pandemic recovery.
Now remember it’s a central banker’s remit to keep inflation under control, so of course they have to publicly state that inflation will return to more moderate levels. Also, ‘transitory’ doesn’t mean inflation is not happening. If inflation is 5% now, goes down to 3% next year and 2% in 2023, then perhaps one can say it was transitory. But you are still 10% worse off in spending power.
We have all experienced inflation in recent months with the usual suspects of food, coffee, petrol, hotels and restaurants creeping up in costs. Companies are talking much more about input cost inflation and the difficulties and costs of getting new employees. Not to mention the ongoing shortage of semiconductor chips around the globe. Meanwhile aluminium prices reached a 10-year high last week, while the broad Bloomberg Commodity Index is up over 20% in 2021.
Another inflationary concern is the sharp pickup in port congestion and a shortage of container shipping capacity, meaning that the cost of sending a container from Asia to Europe is about ten times higher today than in May 2020. These costs and shortages have to feed through to the prices we pay for goods.
Interestingly, it appears the over-60s (those that remember and experienced the 1970s’ high inflation times) have much higher inflation expectations (5.7% over the next 12 months) than the under-40s (3.7%). Over the next three years, the two age groups’ inflation expectations narrow but are still significantly different at 4% versus 3% annually (Source: Bloomberg).
So, we find it hard to believe that the current bout of inflation is ‘transitory’, that suddenly in a few months all this inflation momentum will settle down and effectively disappear. We’re not saying it will be significant or prevalent for many years, just that it looks to us that maybe a few years of 3% to 4% inflation is a reasonable assumption.
If so, then keeping significant investible funds in cash is going to reduce your buying power by 10%+ over the next three years when you allow for the negative deposit rates and expected ongoing modest inflation.
People are increasingly realising this, and we have seen a large influx of new investments as people seek to mitigate this potential spending power loss. Obviously by moving from cash to potentially higher returning assets, some level of risk must be accepted. However, Cantor Fitzgerald has identified and developed a range of interesting funds and ETFs that with careful selection and weighting, can offer investors a well-diversified and excellent risk/reward portfolio to match their risk profiles. Your Cantor Fitzgerald adviser can discuss these investments with you and develop a well-diversified portfolio to suit your risk/return profile.
Pramit Ghose is Global Strategist with Cantor Fitzgerald Ireland.