Inflation
Understanding it and Preparing your Investments
The first Be Prepared blog on July 8, 2024, looked at multi-generation historical cycles by opening and closing with a look at inflation and timeline-correlated stock market results. This blog looks at current generation inflation to ponder whether we may be in another 10-year period of high inflation.
Understanding:
Inflation is more technically measured as the Consumer Price Index or CPI. Canada’s CPI reports that we have experienced 17.6% increase from June 2020 to June 2024. That’s 4.1% per year! With this last year having been ‘only’ a 2.7% increase. Always remember - it didn’t drop to 2.7%, it’s just up less than last year. 1991 was the last year prior to 2021 that Canada was over 3% for a full year and 20 of those 30 years were under 2%. (1)
Thus, Canada’s generational ‘normal’ is around or under 2%. Yet the Bank of Canada cutting rates twice this summer should mean they believe the current 2.7% indicates they have inflation under control. Has anyone buying groceries, or a car recently felt inflation is under control? Me either. This premature rate cutting combined with other factors probably tends to higher inflation for longer. Maybe we Canadians live with 3-4% inflation on average for another five plus years?
I’m not alone in this thought. Many of the smart money persons I follow, like the Outlook 2030 panel (2) and Lyn Alden in her April 2024 newsletter (3), believe we are in for an extended time with higher than ‘normal’ 2% inflation. Potentially through the remainer of the 2020’s.
Jeff Rubin evaluates changes in the global economy thus far in the 2020’s in his recent book (4) and states “inflation is here to stay”. His premise is that the continuing sanctions and conflict between competing nations will continue to drive the reversal in globalization of the economy we witnessed for the 3 decades since 1991. Friendshoring product manufacturing will drive higher price inflation. AI will have a counter-effect on wage inflation in the white-collar space but our fundamental needs like food, shelter, power, and all their feedstocks will still be made by real people doing real work for increasing real wages.
If we accept this probability of higher inflation for several years, what can we do about it? We know higher inflation reduces the amount of funds we have left to live day to day, less to pay off debts, and, if we are fortunate, less to save and invest in our futures.
Preparing:
Our day-to-day personal finances tend to suffer from high inflation. As costs go up faster than incomes our ability to spend, pay down debt, save or invest goes down. For the balance of this blog, we’ll look at how to prepare your investments for inflation.
We have learned the best investments for high inflation are real assets. Real assets are physical or tangible goods that can’t be created easily. Real estate, farmland, commodities, infrastructure, utilities, and the producers of these assets like miners and some manufacturers. While tech, financials and other growth stocks are still driving the stock markets today, they are not hedges against inflation. The 60/40 stock/bond portfolio and its iterations are also less likely to reward investment through higher inflation periods.
We have prepared. We personally have our entire investment portfolio in a diversified range of primarily real assets, some fixed assets and cash. Given our age, the majority is tilted toward risk management with a minority focused on high return. Only 20% of it’s in the stock market and none in the bond market.
What can you do?
· Prioritize paying down debt before increasing your investments
· Ask your financial advisor where you are positioned relative to inflation and real assets. Remember, they work for you
· Check your pension plan to see where they invest on your behalf
· If you DIY invest, think about reviewing the references yourself
I’m happy to be a sounding board for any of you when you dig into where you are relative to being prepared for inflation.
1. Worlddata.info/America/Canada/inflation rates
2. Vancouver Resource Investment Conference – Outlook 2030 panel, February 2024, YouTube
3. Balanced Portfolio Construction - Lyn Alden.com, April 2024 newsletter
4. A Map of the New Normal – Jeff Rubin, 2024