After more than 30 years of deflationary pressures, is the cycle about to turn towards inflation and maybe even hyperinflation?

That’s what some investors believe, based on the staggering amounts of new money being created to deal with the recessionary impacts of Covid.

The rise of bonds and shares

In theory, all this extra money, much of which is targeted at consumers, should lead to increased spending in the economy. More money chasing the same goods and services typically leads to prices going up.
However, economics commentator Michael Roberts points out quantitative easing has been going on since the global financial crisis of 2007-2008 and to date, this hasn’t led to an inflation of consumer prices in any major economy.
Instead, what has happened has been a surge in the prices of financial assets, including bonds and shares.

US unemployment

The problem is not inflationary ‘overheating’; it’s whether the major economies of the world can ever recover sufficiently to get close to ‘full employment’.

The official US unemployment rate may be ‘only’ 6.7% but even the statistical authorities and the Fed admit it’s probably more like 11% to 12% and even worse if you include the 2% of the labour force that has left the labour market altogether, he says.

If profit levels of businesses in any economy do not rise back to pre-pandemic levels at a minimum, the investment will not return sufficiently to restore jobs, wages and spending levels.

Roberts’ view is that such a return is not likely for some time.

If he is right, then inflation may be with us for a while but will not be a long-lasting phenomenon. That suggests investing in gold, oil and food may be a good short-term trade, while utilities and healthcare could be better plays for the longer term.

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