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Warning signs are everywhere for an uplift in global inflation but that will be bad for many asset classes

Posted on 16 March 2013 with no comments from readers

Every now and again a national statistic crosses this desk that is so obviously wrong as to be absurd. Take Dubai CPI inflation of 0.1 per cent for 2012. No matter that house price rental inflation ran at 10-20 per cent last year, and that this comprises around the third of the average family budget.

That’s without considering the hike in health insurance or the higher food prices in the supermarkets. Partly this is down to a strong cyclical recovery from the nemesis of 2009, and partly record regional oil revenues and Arab Spring immigrants, safe haven tourists and additional GCC government spending to keep people happy. Still it all adds up to inflation.

Inflation all around us

Dubai is hardly alone. The Indian Governmet is struggling to contain rising inflation. China is putting curbs on property investment in a desperate bid to cap inflation. The Bank of England admits it has allowed three rather than two per cent inflation for 90 per cent of the time over the past decade. The Bank of Japan would like more inflation and has started printing more money to cause it to happen.

Leading the choir of money printing central banks is the US Federal Reserve with $1 trillion per annum coming off its printing presses. Governments have fallen for the old canard that you can print economic growth. True you can raise nominal growth by inflating price levels but that is about it. There is no such thing as a free lunch.

Once inflation gets a grip it has a nasty way of redistributing money away from the poor and distorting proper investment flows. It’s an economic disaster not a cure all. South America went from riches to poverty in the first half of the twentieth century thanks to money printing.

Inflation curse

There is also an assumption at present that all asset classes will somehow benefit from rising inflation. That’s only true in the initial stages. You only have to look back to the US and UK in the 1970s to recall what happens next. Real estate and stock market bubbles burst horribly in 1974 and then both asset classes lost out miserably to rising consumer price inflation thereafter.

That said bonds were also trounced by inflation back then. Cash actually easily beat equities and real estate in the late 70s because interest rates shot up and almost compensated for inflation, though that shot bond prices to pieces.

But of course cash was not the real winner. The hard currencies to own back then were oil and gold. Holders of the shiny stuff and black gold saw their wealth grow in real terms. The Oil States and cities like Dubai boomed while the rest of the world struggled to stay afloat and investors in all other asset classes lost money.

Will history now repeat itself? ArabianMoney thinks this is the way the global economy will go for the next three to five years, and then something will happen to reverse things again. If you would like our insider view on how best to invest then you need our monthly newsletter with its easy-to-follow actionable investment advice (click here).

Posted on 16 March 2013 Categories: Banking & Finance, Bond Markets, GCC Economics, GCC Real Estate, GCC Stock Markets, Global Economics, Gold & Silver, Oil & Gas, Sovereign Wealth Funds, US Dollar, US Stocks

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