Surviving the brave new world

The first in a series on the implications of a low inflation climate that has turned investment decision-making on its head

One constant in the world of money is that financial markets never stay still. Perpetual flux provides the opportunities for investors and borrowers to obtain the best rates and the highest returns. But in the constant search to buy low and sell high it is easy to be blinded by the market's short-term movements.

But what happens next week or even next year is arguably less important than the underlying economic conditions driving the long-term movements of the markets. Anyone taking out, for example, a 25-year mortgage or investing for retirement should be worrying more about how the markets will behave over the next decade than over the short term.

The financial world, undergoing its biggest change for a generation, is likely to confuse anyone who still thinks in terms of the last 15 or 20 years. The conditions that apply now and probably well beyond the end of the decade are, in crucial ways, the mirror image of the 1980s.

The freewheeling Eighties were a decade of sometimes runaway inflation, soaring house prices, borrowing on an unprecedented scale, surging corporate profitability and, most of the time, soaring stock markets.

The most fundamental change is probably in people's expectations of inflation. Since the Second World War, the industrialised world, and Britain in particular, has accepted relatively high rates of inflation. Such a long period of inflation is something of an historical aberration, fostered by policies encouraging high employment and high economic growth.

After some false starts in the 1980s, there is now a genuine social and political consensus across most of the industrialised world that inflation must be kept low at all costs. In most countries, including Britain, it does seem to be under control.

Low inflation implies lower economic growth than we have been used to. Recent interest rate hikes in Britain and the US, for instance, are designed to damp down excessive economic growth that might otherwise have provoked a resurgence of inflation. That process looks set to continue for the rest of this year at least, with economists expecting base rates to head up from 6.75 per cent to between 7 and 9 per cent before levelling off.

Borrowing is already, and will probably remain, comparatively expensive. Although real interest rates occasionally rose sharply in the 1980s, there was always the prospect of a severe bout of inflation to erode the value of loans. That encouraged individuals and businesses to borrow. Many people stretched their finances by taking out a large mortgage with every confidence that the value of the loan would quickly erode.

But there is no such help from inflation in view for the next decade. So in this new world of low inflation and low economic growth, what is the private investor to do?

Over the next few weeks we will look at how the new conditions affect investment as well as how they might influence anyone planning to take out a home loan or some other personal borrowing. The markets have changed for good. Investors used to the old days must adapt because it is a different world out there. The challenge is how to make the most of it.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
News
ebooksNow available in paperback
Arts and Entertainment
Tony Hughes (James Nesbitt) after his son Olly disappeared on a family holiday in France
tv
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
Extras
indybest
Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Day In a Page

Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
10 best high-end laptops

10 best high-end laptops

From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
Susie Wolff: A driving force in battle for equality behind the wheel

Susie Wolff: A driving force in battle for equality behind the wheel

The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

'No abs Adam' plans to muscle in on Usain Bolt's turf

After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum