As long as we’re not talking about hyperinflation, usually you’d only care about real return (after taking into account inflation), those tend to be somewhat stable (so whether inflation is 2% or 6%, returns have usually been similar, same for wages they follow inflation pretty closely). Central banks consider a 2% inflation as the healthy target to keep the economy running well.
The nice thing about inflation is that it’s one of the mechanism to rebalance the labour market, if some job isn’t useful/in demand, it usually won’t catch up with inflation and that’s one of the only mechanism to rebalance wage for useless jobs (salary is sticky, wage cuts are usually unacceptable to people while a slow reduction through inflation is ok).
I don’t think this is going to be a particularly enjoyable ride but I hope I’m proven wrong.
I’d argue that high levels of inflation are terrible, things usually become more expensive faster than wages rise. As people pay more for things they absolutely need (e.g. electricity, gas, food) they will have less discretionary income to spend on goods and services that they don’t need (e.g. Netflix subscription, new car, new iPhone). That will hurt the economy and it will compress margins for some companies (many in the consumer discretionary sector) because they won’t be able to raise prices at the same rate that costs rise. Share prices might still go up in nominal terms but not necessarily in real terms.
And at some point central banks could feel compelled to raise interest rates to stop the above spiral which causes another issue for investors. As the “risk-free return” (US government bonds or interest on cash) was very low recently it made sense to price stocks even higher. As debt servicing costs were low, growth companies received higher valuation multiples. Money-losing businesses survived longer than they would have with higher interest rates. Falling interest rates were a tailwind for those companies, rising interest rates would be a headwind.
Surveys show that inflation expectations have gone up significantly, which makes the “transitory” idea sound unlikely to me. If people have higher inflation expectations they spend more of their money earlier, because they think it’ll lose some of it’s value and probably demand higher wages at the same time. Which adds fuel to the fire.
Ultimately, economic cycles were always part of the story and my understanding of the prevalent idea in the FIRE community is that a long enough investment horizon (12+ years) will fix this. We’ll see.
I’ve been thinking a bit about the impacts this would have for swiss people. Inflation in the rest of the world doesn’t impact us directly (though it has indirect effects). We’re currently confronted to an inflation closing up on 2%, so a slight loss of purchasing power.
Ultimately, shouldn’t inflation hitting other countries get passed on in forex rates, so that the USD would loose value in regards to the CHF? If so, stocks are mainly safe (though some money will go out of them when/if the FED raises rates), though bonds would be loosing purchasing power. Discrepencies are probably happening on the short term, so the end result isn’t really known, but long term, things should (?) stabilize, interest rates go up a bit, stocks correct (a bit?) but the value of companies go up and current bonds loose value.
Time to either sit on our hands, enjoying our peace of mind, or hunt for a raise.
SNB is intervening to keep down the value of the CHF via (a) -ve interest rates and (b) because some investors are still prepared to pay to store their savings in CHF they are also printing CHF to buy assets denominated in other currencies.
I can’t figure out how all this will unwind, but there is certainly room for SNB to let the CHF appreciate vs other currencies which would have a downwards impact on import inflation.
Switzerland is up 1.2% year on year, the highest since 2018.
We’ve had some noticeable inflation in plastic (pipes, at least), steel and other items. Some items are difficult to get a grip on (at least through the special programs we use), like computers, but as @Barto states (thanks for the insights!), the SNB has some tools to deal with widespread inflation if that should become a threat.
Historically higher inflation was generally a killer for growth stocks (e.g. tech stocks), but it wasn’t affecting that much value stocks. Very high inflation is a killer for everything except gold (and perhaps bitcoin) - as the rising costs of inputs, and need to constantly pass higher costs on clients, and the constant push of the employees for higher wages ruins the macroeconomic stability of the economy - look at any scenario of hyperinflation, like Poland in late 80s, Weimar Republic in 20s, or modern Zimbabwe. A sudden rise in inflation is also a big problem for companies because they need to instantly pay higher costs for inputs, but they aren’t prepared for passing these costs on to clients - this obviously takes time and can’t be done overnight. But I doubt we will have really bad inflation. My view is that it will be elevated for some years and this should boost value stocks and handicap growth stocks. In any case, this should be anticipated by investors and thus priced in the market. Probably we will see lower real returns in the coming years.
High inflation sucks especially for the poor who don’t have stock market investments. They usually are in the worst position to negotiate a raise (to catch up with rising prices), and their savings are getting crashed (especially with the zero interest rates on the bank deposits and low returns on government bonds). IMHO, high inflation in combination with low interest rates is a machine to exuberate wealth inequalities.
Another practical impact of inflation is that it will cause USD worth less in CHF. A practical recent example is PLN (Polish zlotys) which was about 4 PLN for 1 CHF a few months ago, but now after a few months of elevated inflation 1 CHF costs 4.5 PLN. I think in the long term similar effect will be with USD, so our investments will be worth less in CHFs. Bad news for those who plan to retire in Switzerland with USD-denominated dividends and capital gains.
PS. I elaborated a bit on inflation and money supply here:
Why use CPI-W and not CPI-U (at 6.8% YoY)? That’s less than 1/3rd of the total population. Also, why is inflation hitting wage earners more than, say, self-employed, retired or unemployed people?
It is per se interesting. But for various reasons it is especially interesting IMHO: unions, or workers who are switching jobs or negociating wage hikes, are likely to monitor that metric rather than CPI-U. CPI-W is used for automatic increases in social benefits. And FIRE candidates are often urban wage earners, aren’t they?
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