No one likes to have a monster under the bed. And even if your parents say there is no such thing as a ghost, as a child that’s not what it feels like. In the financial market, there is also a monster lurking sometimes. One that has the capacity to scare the living daylights out of everyone: the inflation ghost. How afraid of that should we really be?
The bad news: this ghost is real. In western countries there have been three periods of massive inflation in the last century. In the Netherlands, this amounted to an average of about 10% during both world wars. In the seventies, it was 7% a year. At that rate, your money is only worth half of what it was after ten years. That means the same pension will only get you through half of the month.
The damage can already start before the monster even stirs. Because it is the fear of inflation that can cause interest rates to rise before even one price tag has been received. Because inflation makes government bonds with fixed remuneration in Euros less attractive. If scared investors then dump these items, the price goes down and interest goes up. And a higher interest rate also has a negative effect on shares and housing prices. It makes future profits and renting worth less. And home buyers will also not be able to borrow as much.
Financial markets take rising inflation into account. This can be seen in the increasing price of insurance for inflation. Why? Rising optimism about economic recovery due to vaccines and fiscal injections plays a role. Inflation is higher in an economy that is growing. But more expensive raw materials and logistical problems can lead to higher prices. A shortage of chips affects production costs, a shortage of containers in the right place drives up transportation costs.