Inflation is one of the macroeconomic factors that individual investors rarely take into consideration when planning their futures. It is one of the many benefits of seeking professional advice. 

We all, being members of the global economy, understand the effects of inflation with regards to the Consumer Price Index (CPI). This refers to the annualised increase in the cost of goods and services. The effects of CPI will vary from country to country as many other macroeconomic factors will affect their rates. Simply put, CPI is the rate of increase in the cost of a loaf of bread each year, as an example. 

What is commonly overlooked is the reverse impact of inflation; not just that prices go up, but that money has a decreased ability to purchase goods. As investors should be looking to diversify their asset base across multiple countries, one can use the global CPI rate as a basis for planning their wealth strategy:

Fig. 1. Global Inflation – 1982-2018 – SOURCE: The World Bank 1

The graph above (or Fig.1) shows the global inflation for CPI, using data from the International Monetary Fund and International Financial Statistics. It clearly represents a pattern of fluctuating inflationary rates over time. It provides evidence that a financial plan is a living model which needs to accommodate changes throughout time. 

Fig. 4. Erosion of Wealth by varying inflationary rates. SOURCE: Calculations by Legacy Wealth 

I produced the above graph which has value in concept even if the specifics are not as applicable to all our clients. The graph shows the effect of inflation on the buying power of money – using 100 US dollars over the course of a 25-year term. 

It clearly illustrates the negative real return of wealth in an environment that allows inflation to erode the buying power of your capital. 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.

This article is a general communication being provided for informational purpose only. It should not be relied upon as financial advice and it does not constitute a recommendation, an offer or solicitation. No responsibility can be accepted for any loss arising from action taken or refrained from based on this publication. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.

1 – Global Inflationary Rate taken from WorldBank.org:  https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG 

By Alex Konarski (RNF No: KAD300070330) Head of Planning – Legacy Wealth, with extensive work experience in investments, insurance and advice, and helps provide planning solutions to clients. Based in Singapore, Alex can be reached at Tel: +65 6536 0121