9.4
7.721 Reviews
English
EN
Inflation in the eurozone rose to 4.9% in November, the highest Inflation rate since the introduction of the currency union in 1999. This exceptionally high inflation is the result of a combination of factors, such as rising energy prices, higher transport costs and various VAT increases. The speed at which inflation is rising is particularly worrying.
A year ago, according to official figures, there was still deflation in the currency union. At that time, prices were even 0.3% lower than a year earlier. In a relatively short period of time, inflation has therefore exploded, far above the target of central banks. In several European countries, inflation is much higher than the average of 4.9%. For example, prices in the Netherlands rose by 5.6% year-on-year in November, while those in Germany and Belgium were 6% and 7.1% higher respectively than a year earlier.
Inflation in the Eurozone to highest level ever (Source: Eurostat)
The graph above shows that inflation in the eurozone and in the Netherlands initially fell during the corona crisis, but then started to rise rapidly. Due to the corona pandemic and lockdowns, logistics chains were disrupted and the consumption behaviour of households changed. In addition, large-scale fiscal support programs were introduced in many developed economies, which meant that more money was offered for the same supply of goods.
Below you can see the development of inflation in various European countries over a longer period of time, namely since 1997. This graph shows that inflation has been high more often, such as in 2001 and 2008. Yet the average in the eurozone has never been as high as it is now. But what exactly does this mean for your purchasing power? And what does that mean for the gold price? In this article, we address five questions about inflation.
Inflation is also rising rapidly in other countries (Source: Eurostat)
The inflation rate is measured by a basket of goods and services. It is a somewhat arbitrary way of measuring inflation, because the spending habits of every household are different. Certain goods are becoming more and more expensive, while other products such as electronics are becoming cheaper. If, on the other hand, you eat out often, you will notice that prices rise quickly.
As mentioned, the coronavirus pandemic combined with lockdowns has had a profound effect on the global economy. People were able to spend less money on services during this period, leaving them with more money to buy things. A huge demand for goods caused problems in logistics chains, because there were not enough containers to get all the goods from China to Europe and the United States. Also, empty containers do not return on time, resulting in Long queues for container ships.
This problem was exacerbated by government intervention. Due to large tax incentives, many people suddenly had extra money deposited in their bank accounts. This gave an extra boost to consumption. It led to economic growth, but also to higher prices. This price increase is exacerbated by higher energy prices, because the cost of energy is indirectly reflected in the cost price of many products. For example, energy prices in the Eurozone were already 27% higher in November than a year ago.
Central banks have claimed from the outset that high inflation would be temporary. They thought that the logistics chains would return to normal after a few months and that the hoarding behavior of consumers and companies would also decrease. This position seems increasingly difficult to defend, because the logistical problems are far from being resolved. On the contrary, the prices of container transport by sea are still Exceptionally high, as well as energy prices.
It does not look like this problem will be solved within a few months. And even if that's the case, more price increases are on the horizon. Take, for example, producer prices, which in countries such as Germany and Italy are currently about 20% higher than a year ago. There is also a shortage in the labour market in many countries, which will cause wages to rise. All these price increases will translate into higher prices for goods and services in 2022.
The U.S. central bank made its first U-turn on inflation this week. Fed Chair Powell said that the word 'temporary' no longer fits in the current situation. The word would have different meanings for different people. However, he reiterated that the factors currently causing high inflation are not permanent. The ECB has not yet made a U-turn, but is under increasing pressure to adjust monetary policy. We therefore look forward to the ECB's next meeting on 16 December.
The high inflation of recent months is regularly linked to the monetary policy of central banks. They would print so much money that it was bound to lead to inflation. That is a bit more nuanced. It is true that central banks are still buying bonds and their balance sheets are growing, but that is not the same as printing money.
Central banks withdraw bonds from the market under quantitative easing, but do not return any money. Banks get more claims on the central bank in the form of reserves. However, they cannot use these reserves to provide loans. Nor can they distribute these reserves to the staff and shareholders. The central bank asset purchase program does not bring more money into the economy, contrary to what many people think.
Indirectly, the monetary policy of central banks may have an impact on inflation. Due to the extremely low interest rates and the purchase program, people may think that interest rates will remain low for a long time, causing them to save less and consume more. That does have a price-pushing effect. Central banks can also lose their credibility in the long run, making people less confident in the value of money. When more savings start bidding for goods and services, their prices will rise.
Since the start of the coronavirus pandemic, the M2 money supply has increased in both the United States if the EU has risen considerably. This is not due to central bank asset purchase programmes, but mainly to the enormous fiscal support measures. In the US, the money supply rose extra fast, because the US government paid for part of the support package from its account with the Federal Reserve.
In recent decades, a great deal of research has been done on the relationship between the Gold price and inflation. This shows that there is no clear link between the official inflation figures and the gold price in the short term. And that makes sense, because inflation rates vary from country to country and are also influenced by things like VAT increases. This is despite the fact that the gold price is global and subject to external factors such as geopolitical tensions and turmoil in the financial markets.
If we look at the longer term, we see that gold does offer protection against currency depreciation. The gold price is volatile on a daily basis, but on balance the gold price has risen sharply over the past few decades. Since 1971, it has even increased by an average of 8% year-on-year, which means that the precious metal protects your purchasing power from inflation in the long term. And in the long term, the precious metal does that much better than the savings account, because the savings interest rate was on average much lower than 8%.
At the moment, the outlook for savers looks completely bleak. Inflation is high, but savings rates are at 0%. The real interest rate - that is, the interest rate minus inflation - has therefore been negative for a number of years. And they are very favourable conditions for gold. The graph below shows that the gold price fell when real interest rates were high and rose when real interest rates were negative. Meanwhile, the real interest rate in the US is about -6%, as we wrote earlier in This article. These are percentages that we have not seen since the late 1970s. And as you know, the price of gold skyrocketed in those years.
Gold performs well at negative real interest rates (Source: World Gold Council)
A well-known saying in the financial world goes: 'Cash is King'. When a financial crisis breaks out and the prices of most asset classes fall, you can use cash to take advantage of all the buying opportunities in the market. But due to extremely low interest rates combined with high inflation, you are now paying a relatively high price to stay in cash. The savings account yields 0% interest, while the valuations of, for example, real estate and shares go through the roof. So you miss out on a lot of returns by staying in cash.
As a saver, should you participate in this madness? Of course, that depends entirely on your personal situation. But as long as inflation remains high and interest rates remain low, saving yields nothing. In fact, the purchasing power of your savings evaporates. That is why it remains important to diversify your portfolio.
And even though the price of gold can fluctuate considerably in the short term, in the long term the precious metal has proven to retain its purchasing power. In addition, gold has little correlation with other investments, so the precious metal can reduce the downside risk of a well-diversified investment portfolio.
Disclaimer: Goudstandaard does not provide investment advice and this article should not be considered as such. Past performance is no guarantee of future results.
This contribution was made from Geotrendlines
