Across the world, investors are slowly coming to terms with the return of inflation. U.S. consumer price inflation was negative at the start of 2015. U.S. consumer prices are now rising 2.5% compared to a year earlier, and the rate of inflation is heading towards 3%. Euro area consumer price inflation has risen 2% since the start of 2015. In Asia, China, Indonesia, Malaysia, Singapore, Taiwan and Thailand are all witnessing a rising trend in consumer price inflation.
Inflation inspires a particular fear among investors. It does not just lower the spending power of an investor's income. Inflation also reduces the spending power of the stock of savings -- and that potentially represents a significant loss. Most people dislike taking losses far more than they like making gains. On average, people regard the loss of a dollar as being three times as bad as the gain of a dollar is good. This bias, known as loss aversion, makes fear of inflation a powerful motive for investors.
