In recent weeks and months, one term has been appearing more and more frequently in the media. From the New York Times to NZZ, all kinds of media are reporting on inflation. As clearly shown by Google Search Trends, searches for the term 'Inflation' are at a five-year high.
What is Inflation?
Annual inflation describes the price increase of a specific basket of products, raw materials and services within one year (IMF, 2022). What exactly is contained in such a basket, i.e. the calculation methodology itself, differs based on the calculating institution and can always be transparently read for the USA, EU, or Switzerland.
Why Does Inflation Exist?
A low but positive inflation rate generally has a positive effect on a nation's economic growth. The reduction in purchasing power by not investing money incentivizes both companies and private households to invest their money and thus support the economy.
This is also the reason why most national banks have a clear, positive inflation target. The Swiss National Bank, for example, has the goal of ensuring 'price stability'. The SNB defines this with an inflation target rate of < 2.0% per annum (SNB, 2022). The European Central Bank, on the other hand, has a long-term inflation target rate of exactly 2.0% (ECB, 2022).
Global Developments
This started with Turkey, which recorded extremely high inflation rates at the beginning of 2022. In January, the Turkish Central Bank reported a YoY inflation rate of 35% (BBC, Jan 2022).
EU and Switzerland
This topic is also becoming increasingly important in the EU and Switzerland. The most recently published figures from March show that the inflation rate in the EU rose by 7.8% on a YoY basis in March and in Switzerland by around 2.4%.
It is clear that interest rates will probably be raised again in the medium term and the low interest rate level of recent years will not return so quickly. Investors should therefore remain aware that long-term investments in fixed-interest investments are tricky, and the risk-reward ratio must be carefully monitored.
Yours, Niklas
