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Written by: Robert Farago | Hargreaves Lansdown
Ahead of the Easter weekend, you might have bought an Easter egg for a family member, friend or even yourself. But since last year, prices for these chocolatey treats have soared as much as 50%.
Even though inflation, the rate of price rises, has fallen from its COVID-19 pandemic highs, it’s still stubbornly above central bank targets in most nations. With the tariff trade war coming out of the US, we can expect inflation to likely spike again. Raising prices further for more household goods including our Easter eggs.
But what else does inflation mean for investors and are there opportunities?
This article isn’t personal advice. If you’re not sure if an action is right for you, ask for financial advice.
How will president Trump’s tariffs impact UK consumers?
Tariffs being slapped onto global trading partners has led economists to raise forecasts for US inflation and cut expectations for growth.
This scenario echoes the stagflationary environment of the 1970s. The decade had two spikes in inflation, causing poor returns for investors in both shares and bonds.
For now, there’s a brief pause from the higher tariffs for most countries, apart from China, but a flat 10% tariff remains on most goods being imported into America.
It’s not immediately obvious if the 145% tariffs on Chinese goods arriving in the United States will affect prices in the UK.
Yet, on Monday Sony announced a 10% hike in the UK cost of the made-in-China PlayStation 5. The Japanese company cited “a challenging economic environment, including high inflation and fluctuating exchange rates”.
This raises the question of whether consumers outside America will pay more to partially offset the likely hit to US sales once high tariffs feed through into consumer prices.
A lesson from history?
We could see another bout of inflation trigger a repeat of the 1970s, when soaring inflation hurt both investors in both shares and bonds.
Past performance isn’t a guide to future returns.
Source: US Bureau of Labour Statistics, as of 31/12/24.
The twin peak in global inflation in the 1970s is most closely associated with two oil price spikes.
The price rose in 1973, when OAPEC imposed an oil embargo on nations supporting Israel during the Yom Kippur War. And they soared again during the 1979 Iranian Revolution.
Fast forward to the present and prices are down around 10% this month – expectations of slower global economic growth mean less demand for oil.
But other factors behind this earlier episode have closer parallels with today.
US inflation was already high before the decade began – above 6% in 1969. The US started to run a trade deficit, as they do now. And when President Nixon ended the convertibility of dollars into gold in 1971, he ripped up the rulebook for economic relations between countries in place since World War II – the Bretton Woods era.
The economic outlook
There’s also longer-term structural forces that could push inflation higher in the decades ahead.
China and other Eastern European economies entered the global trading system in the early 2000s and helped keep prices down through a boost to the global labour supply. But this one-off boost cannot be repeated.
Across developed countries, aging populations will reduce the number of workers, potentially putting upward pressure on wages as well as tax takes.
But it’s not all doom and gloom.
Bad news on economic growth is normally good news for inflation.
The slowdown in demand leads to excess supply, pushing prices lower.
The high tariffs on Chinese goods will force producers to look for alternative markets. A rerouting of supply away from the US is a deflationary force for other countries.
Plus, the US dollar has weakened among all the chaotic developments in US policy. With many of the world’s commodities priced in dollars, this too is a disinflationary force outside America.
Central banks are keenly aware of the errors made in the 1970s. Many introduced inflation targets and their primary role is setting policies to meet them – with consumers expecting them to succeed. So, while inflation is expected to rise in the near-term, US consumers’ expectations of inflation in three years’ time remain unchanged.
What does this mean for investors?
Put simply, high levels of inflation are bad for investors.
This rang true in the 1970s and again in 2022. For bond investors, rising prices lowers the purchasing power of these fixed income securities. For investors in shares, high inflation has historically led to lower valuations.
Real assets like gold, commodities, real estate and infrastructure can provide above-inflation returns in some inflationary scenarios. But these can be unreliable hedges.
The real estate market has been reshaped by the COVID-19 pandemic and the shift to working from home. Commodities have fallen as inflation expectations rise. And we see the recent rise in the gold price as driven by a flight to perceived safety as stock market volatility increased coupled with emerging market central banks diversifying away from the US dollar for geopolitical reasons.
So, while we do think gold and other alternatives can provide welcome diversification in a portfolio in times of market stress, they are not necessarily effective inflation hedges.
In the short term, we expect shares and bonds to remain volatile due to the unprecedented uncertainty over policy.
For long-term investors, we expect both asset classes to offer a return above inflation, but there are no guarantees.
One way to invest during volatility is through regular investing by direct debit.
Regular investing helps smooth the ups and downs of the market over time through something called pound-cost averaging.
By investing at many different times, you avoid the risk of investing all your money when the market is at its highest and investment prices are more expensive. But remember, investments can fall as well as rise in value so you could get back less than you put in.
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