When worrying about inflation becomes your identity

One of the more annoying type of people you have to deal with in wealth management (at least in my view) are the people who constantly worry about inflation. Don’t get me wrong, inflation is a dangerous thing, and we absolutely need to make sure it remains low and stable because if it gets out of control like in the last two years, it becomes a severe problem for the economy, jobs, etc. But worrying about inflation can go too far and with many wealthy individuals it does.

I cannot tell you how often I had to listen to men moaning and groaning about how the vast amounts of government debt will lead to an inflation catastrophe (no, it won’t as I explain here) or how all that money printing will inevitably lead to runaway inflation (no it won’t as I explain here and in about half a dozen other posts). I understand that this fear of inflation is driven to a large extent by lifetime experiences of inflation, which is why the people who are paranoid about inflation tend to be overwhelmingly white middle-aged men. These guys have been traumatised by the runaway inflation of the 1970s and will never forget that.

But in my experience, there are two characteristics that make it more likely that the person is paranoid about inflation. One, Swiss are particularly paranoid in my view. Even today, they worry about runaway inflation, because inflation is currently… checks notes… 1.0%. I cannot tell you how annoying this Swiss obsession with inflation is, particularly given that Switzerland doesn’t have inflation and hasn’t had double-digit inflation in my lifetime. And I am… checks passport… a white middle-aged man.

The other characteristic that makes people more paranoid about inflation is if they are heavily invested in real assets like real estate or stocks. Let’s ignore for now that it is a myth that stocks are a good inflation hedge (they only are for inflation rates below c.4%) because what matters is that some people buy stocks because they are supposedly a real asset.

This link between being paranoid about inflation and investing in real assets is clearly not accidental, as Geng Li and Nitish Ramjan Sinha from the Federal Reserve show for US investors. They demonstrate that – ironically – people who own real estate and stocks are more afraid of inflation.

That may simply be a cause-and-effect problem. People who are more afraid of inflation want to protect themselves and thus invest more in real assets. But what seems to be going on here is something slightly different. Some people might be just as afraid of inflation and have similar expectations of inflation going forward as these real asset investors, yet they still hold fewer real estate and stocks.

Instead, what seems to matter is how sure people are about their expectation of future inflation and how much they let that expectation influence their behaviour. Investors who own more real assets have on average higher conviction in their views about future inflation. People who are more uncertain about future inflation tend to hold fewer real assets even if they expect inflation to rise. Furthermore, investors who own more real assets tend to have more stable inflation expectations, which is another way of saying they are always expecting inflation to be high and are sure it will happen this time. A clear case of ‘often wrong, never in doubt’, if you ask me.

But if people are sure that inflation will rise in the future no matter the realities in the ground, they can invest as much in real assets as they like, they will never feel secure. Their fear of rising inflation has become part of their identity and nothing will ever convince them that these worries are overblown.