Things continue to improve in the battle against COVID-19, with Australia slowly reopening. This is unquestionably good news, even if the path forward in terms of managing the ongoing health risks remains unclear.
Investors will also have many challenges to deal with in the coming years, one of which is likely to be higher inflation. Over the last two decades, official inflation rates have trended down, with many investors now convinced we won’t ever see it return, and that it’s no longer a risk to manage in their own portfolio.
We don’t agree.
Perhaps more than anything else, the chart below highlights why we think higher inflation is on the way, and why it is now a bigger threat than at any time in the last decade.
The chart shows the balance sheet of the United States Federal Reserve (The Fed), which recently topped USD $7 trillion, and how it has grown over the last 15 years. Note that when The Fed wants to grow its balance sheet, it literally just enters keystrokes on a computer to add zeros to its own accounts. Neat trick!
Note that the grey shaded area in the chart represents the Global Financial Crisis (GFC), which was when the original sharp jump higher in the balance sheet took place. This was as the result of The Fed printing money to stave off the worst of the housing market collapse which precipitated that crisis, as well as support broader financial markets.