Portfolio protection

With higher inflation looming on the horizon, experts assess what precautions investors can take

- DAVID THORNTON

Inflation may be about to make a comeback. By how much and for how long remains a hotly debated topic, but it’s worth understanding how your portfolio might fare if it does lift and what changes you may need to make to guard against it.

At the most basic level, price inflation occurs when there’s an increase in the price of goods and services, measured by the consumer price index (CPI). This can come from excess demand relative to supply, a shortage of supply relative to demand, or a combination of both. More than simply lifting the costs of your goods and services by a dollar or two here and there, inflation has wide-ranging ramifications on investment returns.

Flood of cheap money

If the prophets of doom are correct and inflation does strike, what will have caused it?

At this stage, it’s hard to point to any one thing. For years, economies around the world have received injections of cheap money, and lots of it. Global cash rates have been low for a long time – for example, the US Federal Reserve has kept the federal funds rate below 3% since the GFC.

The rock-bottom rates are coupled with unprecedented quantitative easing programs, which have seen central banks buy back government bonds from the banking sector, thereby providing banks with more cash in their kitties to loan out into the economy.

Then, perhaps most importantly, there’s US President Biden’s $US1.9 trillion stimulus package.

The impact of inflation on investment portfolios will depend on how much it increases and for how long, yet experts are divided.