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James Weir

Investors on tenterhooks over signs of inflation

Economists are divided whether this spike is transitory and will drop back down, or structural and so will continue to rise.

A frustrated US president Harry Truman apparently pleaded for someone to find him a one-handed economist so he would not constantly be told “on the other hand”. Right now, inflation is at the centre of debate among economists with opposing views that are critical for financial markets.

Why is it critical? It’s a broadly accepted tenet of financial markets that low inflation supports higher asset valuations, such as higher price to earnings (PE) ratios. Likewise, the lower inflation is, the lower long-term bond yields are, which means the discount rate used to calculate a discounted cash flow valuation is lower, resulting in higher asset valuations.

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James Weir is a director of Steward Wealth.

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    Original URL: https://www.afr.com/wealth/personal-finance/investors-on-tenterhooks-over-signs-of-inflation-20210908-p58pxf