The higher inflation gets, the less chance there is that savers will see any real return on their money.
"The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague," said the Austrian philosopher and economist Ludwig von Mises.
"Inflation is a policy."
Indeed, in an inflationary environment central banks are able to raise interest rates to slow down the rate of inflation.
However, policymakers now find themselves in a bind. In the current environment rates are being kept low in many markets to spur growth which decreased through global lockdowns. The Federal Reserve in the US have recently said they would be willing to allow inflation to rise as it keeps interest rates low. The RBA in Australia have been purchasing government bonds to keep interest rates low.
It’s also important to note the unique circumstances of the pandemic environment. Global supply chains have been rewired in response to restrictions and complications that COVID 19 has posed. Higher production costs, combined with unprecedented fiscal and monetary support, have fuelled inflationary pressures.
In Australia, fiscal stimulus, built up savings and low interest rates have all led to an increase in discretionary demand for durable goods. Mix in the supply chain issues that have plagued many of these price sensitive good sectors and the inflation narrative starts to look a lot like the overseas experience to date.
Given all this, and with the recovery out of recession being stronger and faster than expected, the risk of inflation is becoming more real.
BlackRock’s Investment Institute believe this “new nominal” will be one of the key themes driving markets in the medium term – a higher inflation regime with a more muted monetary response than in the past.