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Checking in on Cash and Inflation


Checking in on Cash and Inflation

After a seemingly long hiatus, inflation is finally edging up in the United States, driven by a number of factors including tax cuts, commodities, shipping and fuel prices. We think it may be interesting to put the most recent headline CPI print of 2.7 per cent year-over-year into context.

As we know, inflation has been very low since the GFC with the 10-year moving average currently at 1.57 per cent. Hence the recent numbers have been somewhat surprising in that they are markedly above the recent average, creating much debate around what is in store for asset prices from here.

Currently, the market has priced a ~75 per cent probability for the Fed to raise short term interest rates twice again this year into the 2.25-2.50 per cent band as it tried to counter inflationary pressures. While 2.7 per cent is higher than what we have seen in recent years, it is substantially below the ~3.8 per cent average inflation rate since the end of World War II.

U.S. Inflation (CPI) 1872 to Present

Screen Shot 2018-09-27 at 9.42.05 am

Source: The Bureau of Labor Statistics, Warren and Pearson’s price index

It is worth noting from the chart above, that inflation oscillated between positive and negative for the first 60-70 years of our reference period, however post war and with the modern-day focus on preventing deflation (i.e. cutting interest rates, QE, fiscal stimulus, etc.), the more recent experience has largely been inflationary with a notable absence of deflation.

Looking back over this period it is somewhat startling (yet obvious) that a dollar that was earned in 1872 would only be worth five cents today (a 95 per cent decline), this stands in marked contrast to virtually every other asset class from stocks, property, gold, etc. which have seen many thousands of percentage points in appreciation.

 The Decline in Purchasing Power of the Dollar (Inflation Adjusted U.S. Dollar 1872 to Present)

Screen Shot 2018-09-27 at 9.47.34 am

Source: The Bureau of Labor Statistics, Warren and Pearson’s price index

Investors that have been sitting on a little too much of this depreciating asset (cash) should consider allocating it more efficiently in order to not only grow capital but also protect it from deflating over time. As with many financial axioms, Warren Buffett articulates the point rather succinctly, which we will leave you with today:

“The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worthless over time…Cash is a bad investment over time” – Warren Buffet

As we know, inflation has been very low since the GFC, a recent increase to 2.7% has been somewhat surprising. If the Fed raises short term interest rates twice this year what’s in store for asset prices? Click To Tweet

Amit joined MGIM in April 2018 as a Senior Research Analyst after spending seven years as a credit analyst at Credit Agricole and Citigroup, based in New York. Prior to this, Amit was an investment banker with Citigroup for five years in New York and Sydney, focusing on Media and Telecoms; Metals and Mining; and Consumer Products.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Two questions arise – did the ways in which inflation was measured change after 1955? For example was housing excluded?

    Also, this piece seems to be suggesting cash is risky over the long term. I guess the more interesting question is, what is going to happen in the short term to other asset classes?

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