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.

Life and Style
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
ebookA unique anthology of reporting and analysis of a crucial period of history
Luis Suarez looks towards the crowd during the 2-1 victory over England
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform