Investing in times of inflationary pressure [Report]

Why does inflation matter for investment? Will the inflation rate increase even more? What inflation indicators to watch and what can be a natural hedge against inflation? He answers these and many other questions related to investing under high inflationary pressure the latest report from XTB analysts.

Inflation it represents a change in prices over a period of time and is undoubtedly one of the main factors that affect the economy. The inflation rate is also one of the most important information for both consumers and investors. It determines the real value of cash and the value of the investment, which changes over time. The dynamically changing inflation rate poses a significant challenge for investors,
and its influence on the stock exchange indices and gold prices is considerable.

Pandemic and inflation

The restrictions related to the COVID-19 pandemic have brought the global economy into a deep recession, and oil prices have temporarily dropped even below zero. Central banks have openly spoken about the need to counteract deflation. However, the macroeconomic situation has changed in recent months, driven by countries' increasingly better coping with the pandemic. In Poland, a dynamic increase in inflation has been recorded in recent months, which is currently one of the largest among the European Union countries.

- In Poland, inflation in April rose to the level of 4,3%, significantly above the inflation target NBP and there is little indication that the inflationary pressure will ease off. The question is rather whether we will see 5% inflation in May or only in the following months of the year. This puts the NBP in a very uncomfortable situation. The current monetary policy is the easiest in history. Not only are the interest rates close to zero (the reference rate is 0,1%), but there is also a government bond purchase program. This makes it easier for the government to finance the deficit, but seems less and less suited to macroeconomic circumstances. - said Dr. Przemysław Kwiecień, chief economist at XTB and author of the report.

Central banks around the world have been surprised by the strength of the recovery and the rise in costs that encourage firms to raise prices. Interventionism, which saved the global economy from collapse, meant that households sometimes had higher incomes than if the pandemic had not happened at all, and for many months they were not able to meet all expenses. At the same time, the policy of free money encourages investors to look for alternatives to cash, which include had a significant impact on the prices of raw materials, driving up costs for companies. How should investors behave in such a situation?

- In this report, we focus on inflation in the US, because it will determine the Fed's policy, which in turn is of key importance for global markets, including the zloty and the WSE. We show which inflation measures should be monitored and which inflation data releases are the most important. We also answer the key question that both professional investors and households ask themselves - will inflation rise? - adds Dr. Przemysław Kwiecień.

Five reasons for rising inflation

When building an investment portfolio, you should take into account a number of factors that may affect the effectiveness of investments. Inflation undoubtedly belongs to this group. XTB analysts distinguished five indications in relation to the American economy that may indicate a further increase in the inflation rate:

1. Significant money transfers Due to direct subsidies, special unemployment benefits and other forms of support, American households have more money than if the pandemic had never happened.
2. Huge cumulative demand - Consumers were unable to spend money on many goods and services due to restrictions - now they may want to make up for lost time and spend their money after opening the economy
3. Rising commodity prices - not only more expensive clothing, prices are also rising copper, cotton and grains - this is partly due to zero rates as investors treat these assets as investments.
4. COVID-19 costs - the economy opens up, but the sanitary regime will be maintained, which entails higher costs.
5. Less competition - due to lockdown, some companies were closed, especially in the area of ​​services. Less competition means more pricing power.