Inflation Soars

What does this mean for your investment portfolio?

June 3, 2021

Photo by John McArthur on Unsplash

Inflation has been on the radar of most economists throughout the pandemic as a watchlist item. Most expected inflation to increase earlier than it has and in a more consistent way, resulting from the change in supply and buying patterns of the general public. In the official numbers, this did not happen as expected, although research now shows some interesting points of clarification for consumer price indexes and the official measurement of inflation.

What is Inflation?

Money is a storage of value, much like any asset class, such as stocks, your house or fine art. However, unlike assets, money devalues over time in relation to the inflation rate. The $10 you have today, will not buy the same amount of goods ten years from now. From 1915 to 2021, the average inflation rate was 3.1%.


Inflation measures the average price level of a basket of goods and services in an economy; it refers to the increases in prices over a specified period of time. As a result of inflation, a specific amount of currency will be able to buy less than before. ~Investopedia


High inflationary periods can mean that the value of money can outstrip the value of other assets, such as bonds or equities. The purchasing power of your money decreases the value of the future interest you would earn from the bond’s coupon rate. Inflation today is measured by official consumer price indexes (CPIs) with a ‘basket of goods’ that are tracked for their daily prices.

How CPIs can be wrong

Governments measure inflationary pressure through these CPIs to be able to counteract large swings to mitigate the negative affects of too high inflation, more than four percent per year, or deflation, negative inflation.

Yet with early research about the CPIs during COVID, it’s clear that many official CPIs got it wrong. These indexes measure a standard basket of goods, such as common consumer goods, groceries, gas, and even things like hotel room costs. Unfortunately, the pandemic drastically changed how people spent their money, and these measures did not change quick enough on the items they measured to accurately reflect these changes. Hotel room fees were still being included in CPIs when most people were unable to travel.

Inflation Soars in Q2 2021

Is this a short or long term trend? This is the central question for investors today. Will this inflationary spike, representing over 4% annual interest continue over a long period of time? If inflation at this rate is maintained for longer than 18 months, if may be wise to start changing your portfolio asset allocation.

Yet at this time, I agree with the author of the Echelon Weekly Insights newsletter that as the economy starts to pick up, the pandemic lockdowns cease and more people get vaccinated, our buying patterns will return to normal and so will supply chains.

It is definitely one aspect of your wealth management that your Advisor should be keeping a close eye on.

Be sure to tune in monthly in 2021 for my continued thoughts on the markets, how they may change and what to expect.

Looking to make a change, want a second opinion, or looking for additional advice? Feel free to reach out to me any time by phone or email.

Author Steve McBride, Investment Advisor, Echelon Wealth Partners, looks forward to connecting with you about your future wealth management needs.

 

Disclaimers

This blog is solely the work of Steve McBride for the private information of his clients. Although this author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and this author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of this author alone, and they have not been approved by, and are not necessarily those of, Echelon.

Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by authors. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

The opinions expressed in this report are the opinions of this author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute this author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Echelon Wealth Partners Inc., its divisions, subsidiaries, and affiliates, do not provide any income tax advice and does not supervise or review any income tax returns. Please consult your accountant.

 

Source(s): 

https://tradingeconomics.com/canada/inflation-cpi#:~:text=Inflation%20Rate%20in%20Canada%20averaged,percent%20in%20June%20of%201921.

https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp

https://www.washingtonpost.com/business/2021/05/13/inflation-stock-market-consumer-fears/

https://www.ig.com/en/trading-strategies/how-does-inflation-affect-the-stock-market-210423

https://www.cbc.ca/news/business/inflation-spending-cpi-covid-19-1.5765625

Echelon Wealth Partners, “Weekly Insights: Inflation Finally,” Internal Newsletter, 17 May 2021.