Warning: 1970s inflation is returning. Expert reveals what to do

ASX shares and overseas stocks are plunging over fears about the economy. How will you cope?

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Share markets are in turmoil, not just in Australia but around the world.

Over the weekend, US stocks fell like dominos in response to poor inflation figures. The S&P/ASX 200 Index (ASX: XJO) followed, dipping 3.55% on Tuesday.

DeVere Group chief executive Nigel Green warned “chronic” inflation like we last saw in the 1970s is back — and that investors should adjust their portfolios accordingly.

“Stock markets around the world are rattled as the average global inflation rate reaches a red-hot 7.4%.”

The big threat, according to Green, is that central banks around the globe will be forced into aggressive interest rate hikes to bring rampant inflation under control.

Already the inflation fires are raging everywhere.

“In the US, UK, and Germany, inflation has risen to the highest rate for 40 years,” he said.

“Consumer price growth has even begun surging across Asia, a region that until recently had largely been able to avoid the broad-based global trend.”

Latin America has seen its highest inflation in 15 years, Green added, and sub-Saharan Africa is expected to see its prices rise a painful 12.2% this year.

“The Netherlands this year nearly tripled to 9.2%, and Australia’s has doubled to 5.3%.”

Green said that supply-side disruptions on an international scale are hurting everyone.

“Supply chain disruptions from the pandemic, lockdowns in China – sometimes dubbed ‘the world’s factory’, Russia’s war in Ukraine, and governments pumping unprecedented levels of aid directly to households and businesses, have all played their part.”

1970s ‘stagflation’ could be making a comeback

In the 1970s, an oil crisis brought economies around the world to their knees as many nations suffered from “stagflation”.

This is the awful situation when prices are skyrocketing but unemployment queues are also lengthening.

People are out of jobs while their cost of living is getting out of hand.

Green is concerned we are in that position once more.

“What remains unknown is how long this difficult period of high inflation will go on for and what will be its lasting ‘legacy’,” he said.

“There are legitimate fears that we could return to chronic 1970s-style inflation, the negative impact of which is being exacerbated by a shrinking economy.”

This week will be huge as stock markets digest reactions from central banks.

According to Green, monetary authorities need to be careful because the problems lay in supply, not excessive demand.

“Raising interest rates is a blunt weapon in this fight,” he said.

“Hiking borrowing costs can only do so much to address the triggers of inflation on the supply side of economies.”

Inflation and rising interest rates will eventually hurt everyone

Green noted that high inflation disproportionately hurts lower and middle-income families far more than wealthy ones.

This is because the poorer groups spend more of their pay packet on essentials like food and energy.

Then on top of that, if interest rates are raised, that hits less affluent people much more as well.

“Lower-income households are the ones most likely to have credit – and higher interest rates mean higher borrowing costs,” said Green.

Then everything could really turn bad.

“It intentionally slows the economy, which might then trigger a recession and stunt companies’ efforts to invest and create jobs which, again, would have a greater negative financial impact on poorer families.”

How to reposition your share portfolio

With the heightened prospect of recession, Green urged adjustments to stock portfolios.

“The Great Inflation of the 1970s is looking increasingly likely to make a comeback, causing market jitters as investors get nervous about central banks’ response,” he said.

“For example, exposure to sectors including energy, commodities, pharma and consumer staples with strong branding ability seems sensible in this environment.”

But as with any part of the economic cycle, Green warned investors to not sell out.

“You should remain invested in the market and ensure that your portfolio is diversified,” he said.

Diversification is key and plays an essential role in managing volatility.”

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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