Unpacking inflation

It is easy to get lost in the numbers, or the noise, when it comes to inflation. Higher inflation rates are a concern, but it is also true that too little inflation, or even deflation can be just as painful (or worse - see Japan). Left unchecked, inflation risks a material loss in purchasing power over time. The CPI numbers published each month represent an average consumer, in reality each individual has their own shopping basket of goods and services that may sit to the left (or the right) of the bell curve. The contents of the shopping basket also changes as investors make substitutes of more expensive products for less expensive ones (or vice-versa). This is not captured in CPI.

From a portfolio perspective, globally diversified equities, smaller and value companies and REITs are well placed to offer inflation plus returns in the medium to long term (10-years or more).

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