Many clients have asked for my thoughts on inflation and whether we should be worried as it relates to the overall performance of their portfolio. Perhaps the best way to start is by highlighting the differences between inflation and reflation.
Reflation is a period of price escalation when an economy is looking to grow and achieve full employment. In my opinion this is currently where we stand, as the developed world emerges from more than 14 months of global lockdowns and lost jobs. Inflation is often considered negative as it is characterized by rising prices during a period of full capacity. In other words, “bad” inflation is sustained high prices above the long-term trend line, while reflation is a recovery of the price levels after falling below the trend line.
Cited in a March 2021 report put out by RBC’s Global Research Team, on the topic of reflation, “At the regional level, the US is expected to be the biggest beneficiary from a fundamental perspective. At the global sector level, reflation/reopening is expected to have the most positive impact for Energy, Industrials, Health Care, REITs, and Financials. Consumer Staples is the only sector in which a negative impact is anticipated.” Here in Canada one would have already expected to see pressure on companies such as Loblaw (rising food prices), but this hasn’t been the case, with shares up as of this writing, approximately +18% year-to-date.
Canadian inflation accelerated in April to 3.4% on a y/y basis (0.5% m/m), above expectations of 3.2%. With help from base-effects, the rise in CPI was largely driven by the energy component which rose 32.7% from very depressed levels a year ago. So again I wonder, is this actually a reflationary effect?
Regarding real inflation, the above mentioned report states, “Interestingly, our analysts are generally not expecting extreme impacts”.
On another related topic, if you look read the report published by National Bank on May 14th (click HERE), they point out that Canadian manufacturers have rarely enjoyed a pricing environment as favourable as the one we’re experiencing so far in 2021. This statement seems to fly in the face of what we keep hearing. Again, perhaps this is a reflection of the fact that there is some mislabeling going on when it comes to inflation versus reflation.
Another important factor as pointed out in the NBC report is, “manufacturers operating in Canada have much better pricing power when compared to those of China and the U.S. Unsurprisingly, this dynamic is coinciding with significant upward revisions for the S&P/TSX companies.”
What remains clear is that the global supply of goods, from mattress producers to car manufactures and everything in between, are hard to come by. The escalated demand for these products, often due to basic human fears that we’ll run out (think toilet paper), has contributed to the current inflation rate. If you couple this with a number of unforeseen catastrophes such as the huge backup thanks to the grounded container ship in the Suez Canal, agricultural droughts, deep freezes and hackers bringing down the largest fuel pipeline in the US (driving gas prices higher), you get the perfect storm for increased prices. Will it always be like this? I don’t think so.
While I’m certainly not predicting that these inflated prices will ease any time soon, I am arguing that inflation as a whole at these high levels likely won’t in any meaningful way affect a well-balanced portfolio over the long run.
As always, if you have any questions, please feel free to reach out to me at 416-842-4238.
Libby
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