It seems clear to many that were the oil prices to remain stable at their current levels, inflation would soar from the low level it is at now. What possible scenarios can you prepare for?
If you have ever driven a motorbike, you well know that you should not focus on any obstacle. Why not? Because it seems that whether you intend to or not, you will actually go towards the thing were you are looking at. That is why most motorbike instructors will tell you to look to where you want to go, rather than focusing on the problem.
Even though XTrade doesn’t give motorbike driving lessons, they have come to realise that this truth seems to be mirrored in the economy world.
Talking about inflation, there are two concepts that coexist: the expected inflation, and the actual inflation. What effect can the first have on the latter? We have realised that oftentimes, inflation expectations are falling, hauling down actual inflation, causing most investors to accept a low level of risk on their investments, preferring little risk in spite of little return.
How would that affect your portfolio?
If the United States gave signs of reflation, the divergence trade of the monetary policy would look alive again.
What would that mean?
For example, that would mean a more powerful US dollar—some think that it could curb the inflation on U.S. goods. At the same time, any dollar gains would be delayed while emerging economies would be cushioned against possible currency drops. As a result both risk assets and the global economy would be looking at a balanced scenario with no inflation nor recession. This would be an ideal scenario for investors, whether you chose to invest or to trade CFDs online with XTrade.
XTrade’s conclusion: Reflation Carries Risk
Imagine the scenario in which the Federal Reserve would allow the inflation index beyond the turning point, what would happen?
First, we would see a spike in nominal bond yields; that would make most investors worry that in the future the Fed—below the curve—would be forced to lift the rates faster.
Were the inflation to have a continuous raise, it would prompt the Federal Reserve to perform a succession of rate increases and that would inevitably shake most portfolios. Utilities and real estate investment trusts, as well as other bond proxies would plummet, while sovereign yields would shoot up.
Is a continuous growth in the world’s inflation caused by the U.S. reflation a possible outcome? XTrade thinks that this is not possible, for now. The reason is that China has kept wantonly selling underpriced goods, thus putting a cork on global inflation levels and causing low nominal growth. And light-speed technological development favours companies to adopt asset-light business models, stifle prices and rise wages.
So, in summary, were the United States Federal Reserve to fall below the inflation curve, panic would possibly thrive and the prices of most assets would definitely suffer.