Inflation: The Silent Thief

November 1, 2021

This month we wanted to revisit something you’ll no doubt have seen in the news over the past few weeks: inflation. The silent, but steady, increase of prices over time is the number one enemy of the long-term investor, and is back in the spotlight.

Channel News Asia last week reported that the headline consumer price index in Singapore edged up to 2.5% year-on-year in September, and the UK Budget on the 27th of October projected UK inflation at over 4% next year (peaking at 5%), well ahead of the 2.5% target.

According to the Office for National Statistics (ONS) the average cost of a pint of beer in the UK stood at £3.88 this September. While this may seem like a bargain to those of us based here in Singapore, bear in mind that’s a 90% increase since 2001 when a pint cost just £2.04. It’s also worth considering that the last decade has seen very low inflation numbers (many of our clients remember first-hand the impact of double-digit inflation in the 1980s).

As Apple release the iPhone 13 it’s also worth remembering back in 2007 it launched at $499. Fast forward to 2021 and the latest version will cost you $1,299. That’s a staggering 160% price increase in just 14 years. 

However, to combat this, a single $1 invested in the US share market is worth $11.49 today, and that's ignoring 30 years of dividends. Bear in mind this is during a three-decade period that included the dot-com bubble, the great financial crisis, and now the Covid-19 pandemic.

And what did you have to do to earn this? Two (behavioural) things:

1. Invest and stare out of the window (much harder than it sounds).

2. Be willing to see your investment value temporarily decrease by about -15% on average every year without being panicked into selling. 

Think of the these expected yearly declines as hurricanes, most certainly unpleasant but they pass.

Will inflation hurt stock market returns? 

While corrections are part and parcel of investing, inflation isn’t necessarily bad news for shares and investments. History shows that many asset classes tend to outpace inflation over the long term and in the last three decades the data does not show any reliable connection between periods of high (or low) inflation and market returns.

Investors are of course always keen to ensure they have a portfolio that can withstand the eroding effects of inflation.

Research carried out by Morningstar across 10 asset classes between 2012-2020 shows how each of these has performed against inflation. The chart below shows the highest, lowest and median returns against inflation over this period. It’s no surprise to see Global Equities have provided a very solid hedge against inflation with these investors being rewarded for their decision to invest (and remain invested) in the best companies in the world.

The past is of course not a guide to the future, but with a well-diversified portfolio you are putting your families wealth in the best possible position to combat the ruinous effects of the 'silent thief'.