Is higher inflation on the horizon?
There has been a lot of news recently about rising inflation. This can be seen in real life examples right now such as lumber prices (for anyone who it trying to build a deck or a fence!), in new home construction with price increases in steel, copper, and lumber, and we expect to see it play out in other sectors. Why is this a concern? Inflation means higher interest rates for borrowing and can decrease how much our hard-earned dollars will buy. Some industries do well in a period of rising interest rates, other do not. Rising interest rates and inflation will also impact our currency as everything is interconnected. We have not seen any sustained rising inflation rates for about 40 years, so this is something new to many investors. This is a unique time in history since last year’s slowdown was caused by the pandemic shutdowns, and not by any economic factors. Over the last 15 months, there has been historic intervention by governments to prop up the economy and assist people through the pandemic. The recovery will also be unique as it will initially be driven mostly by vaccination rates, lowering case counts, and easing of restrictions, which will bring back higher demand and falling unemployment.
The biggest question right now is whether the recent inflation trend is temporary or will be around for a while. Even the experts think it is too early to tell for sure. Most are leaning towards temporary. There is a lot of pent-up demand, and savings are at all-time highs. As the economy moves back to a more normal state, all the intervention that has been provided by governments and central banks will start to pull back. The current inflation has been caused not only by higher demand, but also by supply chain issues such as lumber, and microchip supply issues that are causing slowdowns in the production of many different items. As things start to open, the supply chain should return to normal, which means there will be less shortages, and in turn, less upward pressure in prices. Many central banks have stated they do not intend to raise interest rates in the near future.
What does this mean for you? The biggest impact of inflation and rising interest rates will be felt in the fixed income (bond) portion of your portfolio. This side will struggle over the next few months, and you will not see the same kind of growth that is expected in the equity markets. Remember that fixed income is part of your investment strategy to provide safety, a regular income, and some diversification. Typically bond values will move opposite to stocks, so we use them together to provide a less volatile portfolio. The fund managers we use have access to a wealth of data, and teams to help them analyze the data, that guide their investment strategies. We are monitoring their strategies to actively manage the funds over the next few quarters to make the most of this kind of market. It is important for us to verify they are watching inflation closely and positioning their investments accordingly.
This information has been prepared by Andrea Looker who is an Associate Investment Advisor for iA Private Wealth. Opinions expressed in this article are those of the Associate Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
