Daily Money Minute

Fotolia_54867638_XS_7“Inflation is the one form of taxation that can be imposed without legislation.” ~Milton Friedman

In recent years inflation has been relatively benign. Compared with say the 1970s for instance, rates of inflation are still relatively low. Well at least the headline rates quoted by government statistics are low numbers. Real inflation is probably higher for most people. Either way, even when the rate of inflation is low, it will still erode the value of your capital over time, unless you take steps to preserve value. Saving and investment decisions should be taken with a view to preserving capital value as a priority. So it’s important to keep an eye on inflation. The question is where is the inflation rate likely to be in the future? That will be driven by economic issues such as commodity prices, supply and demand for goods and services, the cost of labour, et cetera. It will also be affected by government policy and whether governments choose to intervene to keep inflation rates low. Alternatively governments might just prefer a little inflation right now. Given the levels of public debt in most developed countries, governments have a vested interest in inflation rates getting higher. The reason being that high inflation over time will erode the real value of public debt. High inflation is the only form of default any developed economy could reasonably get away with today. So privately the politicians will not worry too much if the inflation rate gets higher. Yes publicly they’ll make all the right noises about inflation being a scourge and that all their efforts will be committed to reducing it. Privately though they’ll be happy to see inflation work its magic on reducing the real value of the national debt. So if you’re making investment decisions, it might be useful to start with the assumption that inflation could be heading higher for the immediate future.

© Roy Sutton and Mann Island Media Limited 2013. All Rights Reserved.

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