Are You Sick of the Word "Inflation" Yet?

September 23, 2021 | Jeff Gibbons


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If you’re not already sick of the word “inflation” you likely will be. As supply chains grind back to life commodity shortages, shipping and transport bottlenecks are going to continue.

I had lunch with a client last week who works for a food broker that supplies poultry to large restaurant chains. His phone rang numerous times during our lunch with calls from restaurants he doesn’t currently supply. Given he can’t get enough poultry for his existing clients, forget about new ones, he wasn’t too worried about missing the calls. All he’s been able to do is sympathize with desperate restaurant owners and he’s been turning away a ton of business. With much of the poultry coming from offshore there simply aren’t enough containers or ships and the back-up is real. Obviously, neither shipping containers nor large freighters can be made fast enough and his company expects the supply issues will last another year. This is the case for many industries. The global semiconductor shortage that has paralyzed automakers for nearly a year shows signs of worsening as assembly lines in Southeast Asia have been halted again. Semiconductors or “computer chips” as we used to call them are so critical that the White House meets today to gain clarity on the scope of the issue. A new forecast expects the chip shortage will likely cost the car industry more than 200 billion in profits. For those rolling off a car lease suddenly buying the vehicle out doesn’t seem so steep.

 

Yes, as the title of this piece suggests, if you’re not already sick of the word “inflation” you likely will be. As supply chains grind back to life commodity shortages, shipping and transport bottlenecks are going to continue. The bigger question is, will the trillions of dollars of spending that all governments injected into their economies to keep their pre-pandemic mojo cause the type of inflation that will force the hand of central bankers? Will rate hikes stifle equity markets?

 

Most economists believe that the global economy is simply too fragile for significant rate hikes and therefore this scenario is unlikely. If you didn’t listen to the audio-update I sent from RBC Global Strategist Jim Allworth, he goes into greater detail on this. It’s an outlook I concur with from a macro perspective. Markets are likely to grind higher over the next number of years. When it comes to everyday life however, inflation still has its challenges.

 

For those on a fixed income the rising cost of goods can have a significant impact on spending, budgets, travel plans and earlier established financial projections. Add to that the challenges of conservative investing whereby fixed income securities and GIC’s are not keeping up with inflation and you have financial plans that may need to be revisited. As well, good investment portfolios adapt to market conditions. The aforementioned market scenarios and temporary shortages in the supply chain can provide opportunities that will pay off in the years ahead, for those that manage truly "active" portfolios.