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Wealth Wise

Minimizing the impact of inflation 

Head of Investment at Alpian
Victor Cianni
Group 7 Article, 5 min read

Inflation: an inevitability?

Over time, the prices of everything around us tend to go up. It explains why your grandparents used to reference prices from their childhoods that appeared to be from a different world!

This rise in prices - that economists refer to as inflation - isn’t usually a big deal when everyone’s incomes grow at a similar or greater rate. But the problem is that they can rise sporadically. For example, from 1988 to 1991, the annual inflation rate in Switzerland more than tripled from 1.6% to 5.9%.

Inflation would have not impacted you the same way whether you annual budget was spent in potatoes or in IT equipment. In other words, your exposure to inflation is determined by your personal spending choices. 

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Source: Swiss Federal Statistics Office, Worldbank. Data for the period 1984-2020. For illustration purposes only. Prior inflation rates are not indicative of future price movements.

So, what are the causes of these inflation shifts?

While not all of the reasons are understood, three factors have been identified.

One is increased costs for suppliers. A great example is the current shortage in semiconductors. Because they are demanded by everyone – from car to computer manufacturers – companies must pay higher prices to compete for the shortened supply. They must then reflect this in their own prices, or they will go out of business.

Secondly, there’s consumer-driven demand. When the economy is doing well, more people gain the purchasing power to demand the same available goods. Prices naturally rise in order for suppliers to avoid running out of stock (and to maximise profits).

Finally, there’s money printing. Central banks can help stimulate the economies by increasing the amount of currency in circulation. What this does is temporarily give consumers more spending power. They buy more which enables companies to hire more staff to output what’s needed. But over time, the fact that they have diluted the value of every franc or dollar must be accounted for (you can’t just make money out of thin air!) As each franc reduces in value, companies must raise their prices to retain their margins. For example, the surge in inflation during the early 90s we mentioned earlier, is mainly attributable to the Swiss National Bank’s expansionary policy that followed the 1987 stock market krach.

While 100 CHF on your cash account should still be worth 100 CHF in one year's time, the quantity of goods/services you can buy with this amount will decrease if their prices rise in the meantime.

Different spending, different exposure

Switzerland’s inflation has averaged 0.43% over the past five years. This number is calculated by the Swiss Federal Statistical Office, on the basis of a basket of goods and services that is representative of the average Swiss household’s consumption. Because 0.43% is a positive number, it means that the average Swiss private household has seen its purchasing power reduced by this percentage each year over the past five years (or put differently that the prices of goods and services it consumes have gone up by 0.43% each year on average over the past five years).   But the issue is that there is no such thing as an “average Swiss private household”.  Inflation does not affect every citizen equally.

Did we mention that inflation was complex? Because it’s driven by many forces, some industries and sectors are impacted more than others (the earlier semiconductor problem is not going to affect vegetable prices as much as mobile phones). As an illustration, we show below the top prices increases and decreases in Switzerland for the period 2016-2020:

Top increase and decrease in prices in Switzerland over the past 5 years.

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Source: Swiss Federal Statistics Office. Data for the period 2016-2020. For illustration purposes only. Prior inflation rates are not indicative of future price movements.

Inflation would have not impacted you the same way whether your annual budget was spent on potatoes or on IT equipment. In other words, your exposure to inflation is determined by your personal spending choices.

Let’s take a more concrete example to demonstrate this phenomenon. The chart below shows how inflation has impacted the average Swiss household over the past five years and compares that with Victor’s - our Head of Investments here at Alpian.

Different spending preferences result in different exposure to inflation. 

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Source: Swiss Federal Statistics Office. Data for the period 2016-2020. For illustration purposes only. Prior inflation rates are not indicative of future price movements.

You’re in control

Because the data used in these calculations is publicly available,  anyone can conduct their own annual analysis and adjust their spending as necessary. Aside from actively managing inflation exposure by acting on your consumption, you can also regain your lost purchasing power. Remember that one of the assets that is the most vulnerable to inflation is cash. Indeed the liquidities that are sleeping on your bank accounts and that are not well remunerated are indirectly hit by inflation. While 100 CHF on your cash account should still be worth 100 CHF in one year’s time, the quantity of goods/services you can buy with this amount will decrease if their prices rise in the meantime. By factoring in inflation exposure into an investment strategy, it’s possible to target a return that compensates for expected losses.

So, rather than accepting inflation as an inevitability, we can both manage our exposure and compensate for losses. It only takes a little time, attention, and luck.

Bonus

How would Victor’s purchasing power be hit during a high inflation period?

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Disclaimer: Alpian has submitted an application for a full banking license to Switzerland’s Financial Market Supervisory Authority (FINMA). Content of this publication is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.

Group 7 Article, 5 min read
About the author
Victor Cianni
Head of Investment at Alpian

Victor has more than 13 years of experience in wealth management. He has assisted many individuals, families, and institutions in their financial journey throughout his career, either by providing tailored advice on their investments or by managing assets on their behalf. He occupied a number of key positions within the investment divisions of CA Indosuez, Lombard Odier, and Citi Private Bank. He holds an Engineer’s degree in Bioinformatics and Modeling from the Institut National des Sciences Appliquées of Lyon, and he is a certified FRM. In his free time, Victor loves scientific readings and collecting rare books.