The Lasting Of The Passing
Inflation such as we have not seen in 30 years! Headline grabbing in recent weeks. Specifically, consumer prices in the USA rose by 7% year-on-year in December, in Austria by 4.7% and in Germany by 5.3%. These monthly figures made us all sit up and take notice.
You have to go back a long time to find comparable price increases. In the USA, the last time it reached these levels was in the summer of 1982. To find annual inflation in Germany at a level of 3.1% in 2021, you have to go back to 1993, when it was 4.5%. Enough of all these figures.
The specter of inflation
In any case, the current inflation is likely to be fleeting, as the Board of Governors of the U.S. Federal Reserve gave it the epithet “transitory†- last year. The President of the European Central Bank, Ms. Lagarde, followed suit on behalf of the ECB - perhaps it was the other way around and she first named it that way.
Original excerpt from the U.S. Fed press release:
Inflation is elevated, largely reflecting factors that are expected to be transitory.
If you read the headlines of the quality press, Ms. Lagarde, as well as the head of the U.S. Federal Reserve Mr. Powell, are quoted on transitory inflation. In fact, the two leaders always speak of the responsible factors that will pass again, not inflation itself. Small semantic subtleties.
Equalizing deflation
The central banks cannot actually speak of temporary inflation. For that, the above figures mentioned would have to be reversed. What has risen by 5% must first fall by 4.8% in order that we end up back at the initial level.
Thus, inflation can only be temporary if it is offset by deflation. In the current situation, that is rather unlikely and the damage has been done. What am I trying explain? The calculation of inflation is based on the basket of goods.
?An example for illustration
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Within the energy section (electricity, heating oil, fuels, natural gas), gasoline rises from 1.20 euros to 1.44 euros per liter, i.e. by 20%. If the price falls again to 1.20 euros the following year, the inflation was temporary. However, the additional incurred cost was not, because for one year I had to pay a higher price at the pump.
A true compensation would be if the price of gasoline fell to 0.96 euros in the following year, then the effect would have been temporary and I would have saved the additional costs again.
For the economically enthusiastic among you, these considerations may seem banal. Inflation eats away at our purchasing power, transitory or not.
Note: By the way, the market basket is an eternal cause for discussion. Is it true at all, is it manipulated, does it reflect reality? Of course it does not, as if it is true for everyone on average, it is probably not true for you and me. Every basket of goods is different, and even your basket of goods is different every year. The consumer price index - as inflation is also called - is only important where it is used for calculations. Think of rent payments for example.
Think about your deposit
Austrians hold more than 300 billion euros in cash, accounts and savings books; our German neighbors can safely multiply this figure by ten.
You have probably read one suggested solution for investing money better in this newsletter more than once. The solution: invest in productive real assets. Among those assets, who is my favorite? Equities, that is right, how did you know?
Things are a bit rough on the stock market at the moment, with the themes and trends of the last two years sorting themselves out again. A good opportunity for you to think about your portfolio. We will be happy to advise you on this.
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