Inflations Past and Future (Part 1)

What will inflation be in the new economy?

As we emerge from the Great Recession, it’s reasonable to ask what inflation is going to do. After all, inflation determines interest rates, and interest rates determine what the present value of future cash flows are going to be. If inflation goes up, then the present value of all financial assets is less, and stock and bond prices fall.

History is of value as a starting point, but the world is changing. Countries are far more interconnected now than in the past. So we ought to talk about inflations, not inflation, and we should try to understand where it has been before predicting where it will go.

Over the past 25 years inflation has been about 2 ½ percent in the US and in Europe. In the BRIC countries—Brazil, China, India—it’s been more like 7%. Conventional wisdom is that what we’ve seen is what we’ll get—lower rates of inflation in the developing world, and inflation reverting to its mean level in the West.

But the past may not be prologue. Consumers here and in Europe have been through the wringer, and their savings rates seem to be moving up. At the same time, as the global economy rebalances the developing world is likely to see lower savings rates. That means that consumer demand is likely to be muted over here, but stronger in China, India, and Latin America.

So inflation in the US and in Europe may ratchet down another notch to 1% or even lower, while moving up towards 10% in the developing world. That could mean stubbornly low interest rates here and higher rates in the BRICs. What does this mean for asset prices? Hold on to your hats! We’re in for some interesting times.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T20:02:24+00:00 August 6th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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