Rising oil and commodities prices spurred on by loose fiscal and monetary policy coupled with Chinese output growth has created a "positive demand shock" that will lead to further interest rate increases, says Legal & General.
Andrew Clare, financial economist, says the broad-based increase in prices across the globe has in many cases been underestimated because people have been looking at the wrong prices, or emphasising one set of prices over another.
A key example is oil, which, while it has almost doubled in price this year alone – before falling back in recent weeks – is still worth much less per barrel in real terms than during the oil price shocks of the 1970s.
Instead it is metals and shipping freight rates that are really spurring on global inflation, with freight rates up 275% since January 2002, and some steel prices doubled in the same period.
”Oil prices have stolen the headlines, but the real story is much bigger and has been going on for much longer,” Clare says.
The effect for investors will certainly be felt in fixed income products such as bonds.
Here, however, yields will be differently affected by the different monetary approaches of the US, UK and Eurozone.
Most economists are looking at rates increases of another 1% in the UK within the next three quarters, and a rise to 2.25% in the key US rate.
Eurozone bonds could be the big winners especially if the European Central Bank does not put up rates – as is hoped due to lagging economic growth in the 12 member states.
Overall, however, rates are expected to keep climbing over the next couple of years around the world.IFAonline
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