Is Inflation going to run higher for longer?


Have you noticed an increase in prices at the pump lately? How about in the grocery stores? Have you been trying to buy a new home and are getting frustrated with bidding wars? There is no doubt, higher inflation has touched all of our lives. Originally, it was thought by most central banks, including the Bank of Canada, that higher inflation was going to be “transitory” and simply result of the economic shutdown related to the pandemic. However, the longer we go and the deeper we get into recovery, it is becoming more and more clear that this may not be the case and higher inflation may be with us for longer than expected. But what’s contributing to this inflation we are seeing in prices?


Really, there are many factors contributing at this point not the least of which includes low interest rates and government stimulus plans. It is no secret that money has been cheap to borrow with interest rates remaining near historically low levels. With cheap money being borrowed many people have been willing to spend more. Word to the wise as it relates to interest rates, increases are coming and I would suggest that now is the time to ensure your debts are manageable.


The global supply chain has also been put into chaos due to the pandemic. This is likely not a surprise to many of you as it has been all over the news and has impacted most businesses around the world. Anyone trying to buy a new car, furniture or even basic electronics would have noticed delayed timelines. The disruptions to the supply chains have been caused by a number of factors including higher demand, lower shipping capacity and strained labor markets as we try to get more people back to work. The issue here? It is costing more to move goods around the world right now and this price gets passed on to the end consumer, which of course is inflationary. So how easily is this problem solved? Unfortunately it’s not that simple.


The Bank of Canada is certainly walking a fine line right now between getting inflation back to it’s target of 2% per year, while managing the rising consumer debt Canadians are carrying. There is also the concern that we remain very much in an economic recovery and fear that if rates increase too quickly that we will be facing a recession. The central bank has begun hinting at higher rates and I believe that we are likely to see a rate increase earlier than originally expected.


There are no quick fixes for the global supply chain issues unfortunately. Large infrastructure upgrades are needed in order to meet demand including new ships being built and expansion to major coastal ports. Many of these projects are underway but timelines are in the years before completion or we see the full benefits. Likewise, getting people back to work is not as simple as it might sound either. Of course there are still concerns related to Covid-19 spreading and access to vaccines. Many parts of the world are not as fortunate as we are here in Canada. Trying to incent people to come back to work can have inflationary impacts as well as increasing people’s wages has a too fold effect as not only are those people able to spend more money, but the costs of production are also higher.


So, if inflation is going to stick around for longer, what can we do about it?


From an investment perspective, inflation can be a tricky thing. For traditionally safe investments like government bonds which are paying low interest rates, the prospect of a rising interest rate environment could have extremely negative impacts on a portfolio. From our perspective, adding in higher quality corporate bonds as well as increasing our exposure to alternative assets including market neutral investments are a couple of things that we believe should be considered.


Investing in businesses can also be tricky as rising costs related to inflation including rising interest rate costs on debt can certainly be negative for profitability. But that doesn’t mean that certain businesses cannot continue to do well. Companies with strong pricing power can limit the hit to their profitability and continue to keep revenue running high. If you consider businesses which sell products to consumers who are less price sensitive for example including luxury brands or even products which are more of a necessity including smart phones.


I don’t believe we are heading into a hyper inflation situation here in Canada by any stretch, but as we have seen even at current levels inflation can have a huge impact on our lifestyles and our investments. I think we need to expect it to be here for a little longer and plan for it.


-Grant White, CIM®, CFP®


Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Grant White who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.


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