Or does it? A strange title for an article covering investment markets but let me explain. I recently had the privilege of attending the PIMCO Institute, a two-day event discussing all things fixed income, with presentations from leading fund managers and economists, attended by delegates from all over Europe.
One topic which we covered, which has a significant impact on the performance of bonds, was inflation. This is a particularly important topic for bonds as they are nominal assets. By this we mean that if you were to invest capital at launch and hold to maturity, the capital returned will be the same as that invested. If inflation is high, the real value of your capital is eroded over time, a negative therefore for this asset class.
According to official figures, inflation amongst the developed world remains stubbornly low, despite the significant level of quantitative easing which has been undertaken. Many economists at the time believed that this would be highly inflationary but instead it would appear that this has forced its way into asset prices (investments) and not into the wider economy.
Paying particular attention to the UK, the Bank of England has an inflation target of 2%, as measured by the consumer price index (CPI). Since 2014, CPI has spent very little time at this target level, and indeed more time below the desired level than at or above.
The 2% inflation target, which has been adopted across many developed markets, including the US and EU, is now under scrutiny itself, with questions being asked as to whether it is too low, too high, or indeed should the target rate be variable depending on economic conditions at the time.
UK CPI is already subjective in that it is a measure of price movements in a particular basket of goods, each with its own specific weighting. However, not everyone’s basket of spending is in line with the official weightings and therefore everyone’s own rate of inflation is different. Whilst official figures suggest there are very few inflationary pressures, perhaps therefore there are frailties within.
Which leads me back to the title of the article. After a long second day I decided chocolate was needed. On review however I was extremely surprised to see by how much the size of popular chocolate bars had shrunk, none more so than the Mars bar.
In the 1990’s this came in at a satisfying 65g. Today however it weighs a mere 51g, representing a decrease in size of 21.5%. At the same time however, depending on where you shop, the price of this bar has increased from 26p to 60p, a whopping 130.8% rise. Whilst the rise in the price may well be captured in official data, I very much doubt that the fall in size is. And this is not the only product to have seen such change, crisps, cereal, cans of drink are all further examples.
It appears very consensual at present that inflation will struggle to rear its head in any aggressive sort of form anytime soon. An ageing population, disruption and technological advances are frequently mentioned as the reasons why. As history has taught us however, inflation can come back with a vengeance when least expected. Developed market economies have recently slowed and modern monetary theory, whereby the public would be the beneficiary rather than investment assets, is being touted as the potential solution. In our eyes this would be a catalyst.
Within our portfolios therefore we continue to be prepared that such a spike may occur. Our fixed income holdings are diversified across managers following different investment strategies so that should a spike be seen protection will be afforded by some. Equity holdings will also provide protection as long as that spike is not too aggressive, in particular those managers with a value style bias.
So, did the Mars bar help me work, rest and play? Unfortunately I am unable to comment as being the value hunter I am I also spotted a four pack of Tunncock’s Caramel Wafers for £1 and went for those instead!
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