No more QE....for now

As predicted by 29/39 economists surveyed on Bloomberg the BoE rejected the opportunity to hit the printing press once more. I imagine the debate raged on during the meeting and it was a very close call, and I do believe that over the next few months we will see at least another round of £25bn sanctioned. 

With anaemic growth and the threat of a triple-dip the BoE seems hell bent on trying to stimulate the economy in order to aid growth. There is much debate about QE, in relation to both the intended and unintended threats. It seems to me that there will be no real answers on the merit of QE for many years. My concern over all this printing, on a global scale is inflation. At some point it has to feed through the system, at which time we could experience high levels of inflation. If this inflation hits before we are well on the road to recovery it could be very painful. The typical response to inflation is to raise interest rates, however this is detrimental to growth. Higher rates hurt commercial and residential property markets, which therefore effects banks - and we all know the consequences of this by now! So if the recovery is struggling, governments will not be able to raise rates, which means for a time we will have to live with inflation. 

Inflation hedging can be tricky in portfolios. Index-linked Gilts are very expensive. Real assets such as gold are popular inflation hedges, as is property. A more liquid alternative to property are equities, particularly companies whose revenues are linked to RPI. Utilities and infrastructure stocks revenues are often linked to RPI and so these holdings should provide relatively cheap inflation hedges, and many offer an attractive yield, unlike gold and some prime commercial property. 

It could be a way off yet, but inflation in the long run is something I worry about, more so than deflation, as I often read in the press. It will be one to watch closely, and I fear once we have it, it may be something that takes a while to contain!