Are we in Stagflation? 15-Nov-2014

Imagine that your money in the bank account is gradually decreasing time to time.

Obviously, you never see your savings decreasing, instead, you see the savings increasing according to the interest rate. In this meaning, your savings will be same or even more amount time to time.

However, consumer price is increasing time to time as well as your savings are increasing. Question is which of them is increasing in larger scale? If interest rate is greater than inflation, you implicitly win the spread between interest rate and inflation. If opposite, you implicitly lose.

This figure shows the spread of annual interest rate and inflation rate after FX impact adjusted.

Scores of the economic zones, US, UK, Europe have stayed in negative since Lehman crisis. Japanese and Australian scores have been up and down since that time. Currently, only Chinese economy has positive score.

It implies that value of money is relatively decreased in those major economic zones except for China.

Normally, once inflation is going up, the interest rate is also going in order to limit the inflation. But it seems major economy is vulnerable to deflation back again, and this may lead the interest rate being kept at record low level for coming years.

In this situation, diversification into other asset classes can be hedging strategy against inflation risk.