A question smouldering among investment professionals is whether inflation will take hold around the globe as a by-product of immense fiscal stimulus by governments to counter the economic impact of the coronavirus pandemic. This question is how capital will be allocated in an environment where inflation eats away at purchasing power?
The jury is still out on whether inflation will hit consumers around the world or whether it will be localized in the US, where the administration of President Joe Biden has implemented a $1.9tr (more than five times the size of South Africa’s GDP) fiscal stimulus. The administration is currently negotiating a subsequent $4tr in government funds to spend on physical (such as bridges and roads) and social (such as improved childcare and cheaper college tuition fees) infrastructure.
It is, however, not only the US government that is splurging cash to boost economic output. Member states of the EU reached an agreement to set up a €1.8tr recovery fund to rebuild and modernize the economic bloc’s economy. Italy’s prime minister, former European Central Bank president Mario Draghi, plans to spend €220bn to revive his country’s lacklustre growth. Some of the funds will come from the EU and the rest will be sourced domestically. Taking Italy as an example, the country recorded the most coronavirus-related deaths in Europe, had the lowest number of births last year since the unification of the peninsula in the 1860s, and sits with a debt-to-GDP ratio of about 160%. Suffice to say that with debt levels like this, inflation will be a good friend of the Italian government.
Inflation hits the poorest in societies the hardest. With prices of technological services and products moving sideways, or even declining as the case was with hardware ever since the 1980s, food and fuel do not let up easily. The basket of goods bought by low-income earners is usually skewed towards food and energy in a far more tangible way than for middle-income and wealthy individuals. As an aside, it is an age-old irony that increasing interest rates to curb inflation impacts on the middle class and wealthy with access to loans more than on low-income earners.
But will higher inflation take hold across the planet? Investment professionals are torn about the prospects of higher global inflation due to increased spending in the US and Europe.
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