Inflation alert!

The may 26, 2020

Inflation. What is behind this economic term? Could the Coronavirus crisis lead to higher inflation? With what consequences ???

It is characterized by the decline in the purchasing power of money over a long period. That is to say, for the same amount, you will get fewer goods or services than before, so it is a devaluation of the currency (of the euro for example). This phenomenon is measured by the Consumer Price Index (CPI) and results in a lasting and widespread rise in the price level of goods and services. It is therefore not a question of the rise in the price of certain products only, on an ad hoc basis, but rather of a general increase, affecting the majority of sectors and which lasts over time.
Even if it can have positive consequences, inflation is generally bad news for households because it is synonymous with a decline in purchasing power ... One must also be very careful in the management of one's financial investments.

In this context of health crisis, there is indeed a risk of inflation which could take two forms:

  1. Structural inflation: it is linked to changes in the economy. Indeed, companies have to assume additional costs due to compliance with health rules to stem the transmission of the virus: safety distances (therefore fewer employees present at the same time), acquisition of protective equipment ... Production costs are thus likely to increase in several sectors and will mechanically increase selling prices to keep businesses afloat.
  2. Cyclical inflation: the European Central Bank (ECB) plans by the end of the year to inject nearly 1.100 billion euros into the economy in order to support it. This huge inflow of fresh money is achieved through buyouts by the ECB from European banks of corporate and government debt. This is what we call a policy of quantitative easing.

The purpose of this massive injection of liquidity is to allow banks to grant new loans in order to finance the real economy and thus boost consumption and investment. Consequence: an increase in demand which could then translate into an increase… in inflation! To counter this increase, the ECB may be tempted to raise its key rates later, in order to dampen demand and limit inflation, but the risk of a bond market crash may well deter it.

These two types of inflation will therefore potentially be generated by the Coronavirus crisis, thereby threatening your purchasing power.

In times of inflation, caution is advised and it is better to favor certain asset classes over others ... if you wish to benefit from the advice of asset management professionals in order to optimize your savings as well as possible, and anticipate a possible rise in inflation, do not hesitate to contact us. Our Wealth A7 wealth and financial experts are always by your side!

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Article by : Orane TREHET

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