16.02.2024

In this article:

Interest Rates and Inflation in 2024:

You can Still Make a Profit With These Investments

Despite a slight decrease in the inflation rate in 2023 compared to 2022, consumer prices continue to be high. The Federal Statistical Office (Destatis) reports, for instance, that food prices increased by 3.7% in December 2023 compared to December of the previous year. In an era where the cost of everyday items is rising and global crises are defining the economic landscape, these developments pose important questions for investors:

How can I effectively protect my assets against inflation and the associated loss of purchasing power? Which investments can I use to make a profit?

Key Takeaways

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Bowmore Trilogy 1964

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Jean-Michele Basquiat - Flexible

How is inflation developing in Germany?

Target of the European Central Bank:

The primary task of the ECB, as outlined in the EU Treaty, is to maintain price stability, which is the main objective of both the ECB and the Eurosystem. To this end, the ECB targets an inflation rate that is ‘below, but close to, 2%.’

Current inflation trend in Germany:

On average, consumer prices in Germany rose by 5.9% in 2023 compared to the previous year 2022. This data was published by the Federal Statistical Office (Destatis).

Comparison with previous years:

The inflation rate for 2023 was lower than in 2022, when it was still at 6.9%. Despite the slight decrease, inflation remains high at just under 6% and is well above the European Central Bank’s target value.

Inflation turnaround: Surprises in 2024?

Economic experts and research institutes forecast a significant reduction in the inflation rate for the current year. For instance, the Ifo Institute for Economic Research anticipated a 2.2% inflation rate in Germany for 2024. Similarly, the Bundesbank projected that the inflation rate will decrease to 2.7% this year. Joachim Nagel, the President of the Bundesbank, expressed optimism about economic development, predicting that the German economy would return to growth starting in 2024.

There is finally hope on the interest rate market. The question remains: Is the situation really as positive as it seems?

Inflation effects: The current inflation forecasts are leading to discussions about the monetary policy of central banks: according to a Bloomberg survey of economic experts, the European Central Bank (ECB) plans to cut its key interest rates four times over the course of this year. It is expected that these cuts of 25 basis points each will begin in June.

Lower interest income: When the ECB cuts interest rates, interest rates on savings deposits, such as call money accounts, also tend to fall. For investors, this means that the returns on these investments are likely to fall. As a result, they will continue to lose purchasing power in real terms despite falling inflation.

Focus on the current interest rate situation

Savings books, term deposits, fixed-term deposits and call money accounts are considered relatively safe investments, but they do not offer particularly high interest rates in the current economic situation. Despite peaking in the last 10 years, the average interest rate for call money in Germany in 2023 was just 0.37%. For a realistic analysis of the current interest rate situation, however, it must be viewed in the context of inflation. It becomes clear that the nominal return can hardly compensate for the loss due to inflation.

Your actual return: nominal vs. real interest rate

To understand the impact of inflation on investment decisions, let’s take a look at the average real interest rate in 2023. The nominal interest rate is the interest rate that banks offer for investments such as call money accounts. The real interest rate, on the other hand, is the actual return after deducting inflation, i.e. the loss in value that money suffers over time.

Let’s apply this calculation to Germany’s current financial data:

GRAFIK

Based on this data, the real interest rate is -5.53%. This means that the purchasing power of money invested in call money accounts has decreased by 5.53% in real terms. In other words, although investors receive a small interest income, they effectively lose purchasing power due to the significantly higher inflation rate. This is the case even if you have taken advantage of one of the prominent interest rate offers on the market last year, which was around 4%.

So, if the inflation rate significantly exceeds the interest income, traditional savings forms like call money accounts become less attractive. Consequently, it might be beneficial for you to explore alternative investments that offer higher returns and provide better protection against inflation

Achieving returns with strategic diversification

In a world where traditional investments are facing increasing pressure, strategic asset allocation is becoming more important. To reduce risks, investing across various asset classes is crucial. This includes equities and bonds, as well as alternative investments in real assets.

Especially in times of crisis, luxury cars, watches, works of art, and rare whiskies demonstrate remarkable stability. The Knight Frank Luxury Investment Index (KFLII), which analyses the performance of various luxury investment assets, has recorded a stable increase of +7% over the past 12 months. Particularly noteworthy is whisky, which has seen a +322% increase over the last 10 years. The performance of these tangible assets often remains independent of stock market fluctuations, making them an attractive option for portfolio diversification. Moreover, the returns can significantly exceed those achievable through a simple savings account.

This form of investment is nothing new: so-called high net worth individuals have been investing in rare art or luxury cars for decades to secure their wealth. According to the Knight Frank Report 2023, they hold around 5% of their total assets in collectibles.

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Conclusion

Despite criticism of the low interest rates offered by call money accounts, their role as a crucial component of a balanced investment strategy is undeniable. The primary benefit of this investment type is its high liquidity; call money accounts enable quick and easy access to your capital, which becomes especially valuable during uncertain economic times. Therefore, savings investments should always occupy a significant place in your personal financial planning.

On the other hand, investments in tangible assets present not just a means to preserve wealth but also the potential for significant appreciation. These investments transcend mere safe havens; they act as launchpads for potentially substantial gains.

In conclusion, it is evident: Investing all your assets in just one type of investment is not advisable. The foundation of a robust financial strategy is to diversify your investments wisely across different asset classes.

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