Inflation: How High Will it Go?

Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Mike Coop from Morningstar Investment Management. Hello.

Mike Coop: Hi there.

Black: So Mike, we're thinking all things inflation at the moment. I'll start off with, why is inflation picking up in the first place?

Coop: That's a great question. And we've had some surprise numbers coming out of the States and UK. Part of that are transient factors that you'd expect to push up inflation after you've reopened the economy, and you've got shortages, and some disruptions coming from COVID. But some of them look like they could be here longer. So people are asking the question, is this the beginning of a much higher inflation era?

Black: And why is inflation a problem for investors?

Coop: What's really the reason we invest, is to increase the purchasing power of our wealth. In other words, we want to be able to buy more with our money in the future than we can today. So we at the very least need to grow our wealth by more than inflation, in order to be able to to do that. And of course, if inflation is going to be a lot higher, then we need a higher return. So it raises the bar in terms of kind of making sure that we protect our wealth from this drop in purchasing power that we know high inflation hits us with.

Black: So I guess, the real question, though is how high is inflation going to go, because there's a whole generation that have never seen it go above 2% or 3%. What's the likelihood that we could see the return of proper inflation?

Coop: Well, there's three arguments that are being put forward as to why we're on the cusp of inflation going up to 5% plus per annum over a sustained period. The first is that there's just too much money. So governments are printing too much money. The second is that governments are spending too much money with big fiscal programmes, where they're going to be giving money directly to individuals or directly to businesses. And the third is that we're seeing demand outstrip supply. And partly that's to do with supply problems that are not going to go away. But having said that, how can we be so sure that these things will play out? It depends upon what the central bank's response is. It also is the case that forecasters have a lousy track record on these things. And they've -- Peter's cried wolf before on this, although the circumstances are different, we've had previous episodes before. The other thing, bearing in mind is innovation is still putting downward pressure on prices it's making it cheaper to produce goods and services and that anything is picking up. You think about artificial intelligence, and robotics, and the roll out of that. So it isn't a done deal by any means. But it's a scenario you have to take seriously in thinking about your portfolio and the parts of your portfolio that will be able to cope with that. But it isn't necessarily a scenario that you should bank on happening and put all your eggs in there for high inflation basket.

Black: Mike, thank you so much for your time. For Morningstar I'm Holly Black.