Will covid-19 lead to higher inflation?

Inflation Update

"Even at modest levels inflation can seriously reduce your spending power yet the key debate among economists is whether the pandemic-induced financial measures introduced by governments will lead to a sustain period of inflation."

Click here to read the overview of our recent webinar in wich John Butters, CIO, and Paul Dales, UK Cheif Economist, Capital Economics, discussed the impact of inflation on your wealth and what can be done to prevent capital erosion.


Will the financial measures put in place cause inflation?

For the latest generation of British investors, inflation has been little more than economic theory and analysis they may have read or heard about. In all likelihood, it’s not something they would have experienced at first hand. The last time inflation was consistently running above 5%, John Major was Prime Minister and Adrian Maguire was riding Cool Ground to victory in the 1992 Cheltenham Gold Cup.
Inflation has remained under control ever since – even in the aftermath of the 2008 Financial Crisis – but inevitably the Covid-19 pandemic is shifting opinions on inflation’s future path. Opinion is divided on whether the extraordinary pandemic-led financial measures put in place – UK government borrowing is at levels not seen since the Second World War – will cause prices to rise at a faster rate.

This is an important question for all investors to think about because the outcome will have a profound effect on financial asset prices. Inflation erodes the real value of your money over time.

What are the possible scenarios?

There are two main schools of thought among economists on the direction of inflation. On the one side, economists don’t believe the pandemic-led stimulus will be inflationary. They point to the low inflationary environment experienced over the past decade despite the extensive quantitative easing (QE) used to stimulate economies in the wake of the Financial Crisis.
On the other side, economists argue that financial stimulus such as QE is inflationary but that other factors, such as globalisation, which is now in reverse, kept a lid on inflation. They also point out that the stimulus in the wake of the Financial Crisis got stuck in the financial system, while the current stimulus has made its way into the hands of those who are most likely to spend it (be it companies or consumers). That means there is a greater risk of higher inflation this time.

When will this happen?

That is not to say inflation will jump now. Given the uncertainties over the virus, economies and jobs, businesses and households will likely want to sit tight as a precautionary measure – and this will keep a lid on inflation in the near term.
Indeed, inflation is currently 0.5%, having dropped in the immediate aftermath of the pandemic. Prices rose at a slower rate as businesses closed and transport ground to a halt as the world went into lockdown.
With the continued uncertainty and many restrictions still in place, fewer people will be visiting restaurants, shops and pubs, suggesting that inflation will be subdued in the near term.

What does this mean?

Given that all the signals point to a period of low inflation, investors could be forgiven for asking why they need to be mindful of higher inflation now. A no-deal Brexit could trigger a spike in inflation, while at some point the pandemic uncertainty may fade and the spare capacity in the economy used up – and this could lead to a rise in inflation if people and businesses start spending again.
Nevertheless, with interest rates set to stay low (and lower than inflation) for a prolonged period of time as governments give economies time to recover, money left in cash is always vulnerable to inflation risk – even at modest levels.

How will this affect my wealth?

A sum of £100,000 left in cash would be worth £66,671 in real terms (once inflation has been taken into account) 20 years later, if inflation were to run at the government’s intended target of 2%. That same £100,000 would be worth just £35,849 in 20 years’ time if inflation were 5% over the same time frame. Even inflation at 1% would result in a real loss of around £20,000 over 20 years.
Inflation doesn’t need to be sky high to be damaging to the real value of your money and the examples illustrate the levels of return you need simply to keep up with inflation. When properly executed, investing should protect your wealth over the long term. If you leave your assets wholly in cash, inflation erodes their value over time and reduces your spending power each year.

How Weatherbys can help

If you don’t want to spend time creating and constantly updating your financial plans, then let us take care of everything for you. We can work out what you need at every stage of your life. We will help you structure your portfolio to allow for unpredictable market fluctuations. In addition, we will make sure investments maximise your use of tax-efficient structures.

John Butters

Chief Investment Officer

John Butters joined Weatherbys Private Bank in 2016 and leads the investment and financial planning team. Prior to joining Weatherbys he developed an investment service for Aspinalls Family Office. He has also worked as a portfolio manager at the multi-family office Sand Aire, where he managed several investment funds, and at a London hedge fund which inspired his book on macroeconomic analysis, Rational Macro. John holds the Chartered Financial Analyst, Chartered Alternative Investment Analyst and Certified Financial Risk Manager qualifications and is a Chartered Member of the Chartered Institute for Securities and Investment.

Quentin Marshall

Managing Director of Weatherbys Bank

Quentin joined Weatherbys Private Bank as Head of Private Banking in June 2015 from Coutts where he had been Head of Advisory within the investments team and deputy chairman of the Investment Strategy Committee, overseeing c. £30bn of assets. Prior to Coutts, Quentin worked for UBS for sixteen years, joining predecessor firm SG Warburg from university as an Investment Banker. During this time he spent four years advising the Republic of Indonesia during the Asian financial crisis. He also acted for some of the largest FTSE100 companies raising capital and working on mergers and acquisitions. He subsequently specialised in advising family owned companies, moving to UBS Wealth Management to help create the UBS Family Office Group.

Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.


October 2020
Quentin Marshall, Head of Private Banking, and John Butters, our Chief Investment Officer, discuss the global pandemic and what it means for the economy, stock markets, taxes and house prices.



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