The global economic crisis has split the investor community between two camps. One
side expects deflation, a period of sustained price declines, while the other is worried
about inflation, a long-lasting and substantial increase in prices. Inflation was a real
bête noire in the 1970s, but has played an extremely minor role in industrialized countries
over the last 25 years, particularly if viewed without the highly volatile energy and
food components. The core inflation rate, which is calculated without these elements, is
currently around 1% in the US and the Eurozone, lower still in Germany and France, and
was recently even negative in Japan.
However, fears of inflation are growing. The most significant central banks, especially the
US Federal Reserve, have “printed” vast amounts of new money. And sharper price rises
have recently been observed in several emerging markets, including India, Argentina and
Brazil. Commodity and oil prices have also risen by a good 30% over the past 12 months
and the United Nations’ Food Price Index hit a record high not long ago. In addition, the
prices of some financial assets, such as equities and bonds, have climbed steeply over the
last year.
Is inflation or even hyperinflation, which leads to currency collapse, waiting in the wings,
or should we be positioning ourselves for deflation? This is the central question addressed
in this edition of UBS research focus. Inflation is a complex phenomenon, many aspects
of which are unclear. This publication aims to give you a deeper understanding of this
phenomenon. We will shed light on how it arises and what its associated costs and
mechanisms are, as well as discuss relevant scenarios for future price developments and
derive
investment recommendations from these.
We hope you will find this report interesting and informative.