Under pressure? Inflation whitepaper

What drives inflation, where it's heading and what it means for investors.

Prices have gone up a lot over the years. Mr Darcy, in Jane Austen’s Pride and Prejudice, earned his status as one of the most famously flush men in English literature with an income of just £10,000 a year at the turn of the 19th century. Fast-forward a hundred years or so and Charles Foster Kane’s $60 million fortune in Citizen Kane established him at the top of the rich list.

You would need a thousand times that today. When Citizen Kane came out in cinemas in 1941 a ticket cost a shilling (5p in decimalised money). Today the average ticket costs around £7.50, although anyone who lives in London will be wondering where on earth that average cinema is. Even the cost of an appointment with the dentist has risen by 30% over the past 10 years alone.

One of the most complicated and fiercely debated economic experiences of everyday life is why and how prices keep rising. We call this phenomenon inflation. In this report, we examine some of the forces that influence inflation over the longer term, not what might cause prices to rise over the next six months. We’ve got plenty to say on the short-term outlook, but we hope to use this report to provide some thought leadership on a long-term theme for our long-term investors.

Understanding inflation
Even if economics is not your specialist subject, we hope you find this paper conceptually simple because the vast majority of us experience inflation and its consequences every day. Everyone buys goods and services; most of us earn a wage or an income from our savings and investments; everyone ages; everyone lives in a globalised world, which is changing all the time with technology and innovation. Yet understanding how all these forces interact and the effect they have on the prices we pay every time we part with our money is not easy.

Moreover, many of our clients have inflation-adjusted return targets (in economics we call that a real return target). They want to generate an investment return over and above the rate at which consumer prices rise, preserving the purchasing power of their wealth and growing it or drawing an income from it.

This is a vast subject, with an expansive literature. We focus most of our discussions on demography and ageing, on globalisation and technology, and on the interaction between wages and prices. Why these subjects? Because they are likely to be some of the major determinants of the rate at which prices rise over the next 20 years, and the way in which they affect inflation may be changing. We hope this piques your interest. It certainly does ours.

Return to the Inflation hub.
Read the full report here.