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Funds warned on US inflation
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| Matthew Peter
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Big Queensland-based institution QIC has warned superannuation investors to be wary of a potential inflation surge in the US.
In an analysis issued this week, QIC said its research had revealed that an inflation spike could be on the horizon and that superannuation funds would need to be on their guard.
Commenting on the research, QIC chief economist Matthew Peter said the inflationary risk lay in the timing and implementation of the US Federal Reserve’s exit strategy, which had the potential to lead to excess growth in the money supply and higher rates of inflation.
“The Federal Reserve has pumped an enormous amount of cash into the US economy over the past 12 months to fight the global financial crisis,” Peter Said. “Normally these funds would flow into the money supply, but they have been hoarded by US banks with limited credit being extended to households, businesses and investors.”
He said that as confidence returns and banks expanded credit, the money supply would increase with the inflationary impact depending on how the Federal Reserve responded once market conditions normalised.
“While investors believe the Fed will successfully exit from its extraordinary policy stance, the margin for error is extremely small,” Peter said. “If the Fed doesn’t adequately drain excess reserves from the system when the economy recovers, there will be significant inflationary pressures and the potential for another asset-price bubble.”
He said that in a worst-case scenario where the Fed allowed money supply to increase by 40 per cent to 80 per cent, prices could rise between 8 and 14 per cent; and that even if the expansion in money supply was only between 10 per cent and 20 per cent, a period could be expected where inflation averaged between 3 and 5 per cent.
AUTHOR
Mike Taylor
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