Hi there, I'm looking at the solutions to question 5 from this chapter and one of the points outlined is: "The returns on cash instruments may provide a degree of inflation protection as short-term interest rates tend to move in line with inflation." I'd appreciate if someone could outline how this actually happens in practice please as I'm struggling to get my head around how this works in the short-term. I understand that in the long-term they are inversely related. Thanks for taking the time to read this in advance! Colin
Hi - we tend to see the level of interest rates and inflation rates being broadly in line with each other. For example, in the UK in the 1970s/80s we had a long period of high interest rates & high inflation. As inflation rises, interest rates will tend to be increased in order to control it. We are currently in a lengthy period of relatively low inflation and low interest rates: whilst inflation remains low, interest rates can also stay low. Hope that helps.
