Consumers have only had to look at the gas pump or local grocery store the past few weeks to notice the increase in inflation and consumer prices. It seems like everything has gone up – consider:
The good news is our portfolios have benefited from exposure to inflation-sensitive areas like resources and other real assets, as well as underweight exposure to fixed income. Now the big question is – will this inflation be temporary as the U.S. Federal Reserve suggests?
Before we answer the pending question, let’s analyze the driving forces behind inflation:
While the price pressures from scarce goods and pent-up demand are clearly transitory, wage gains could drive things further. However, it’s hard to imagine a sustained wage-price spiral where increasing wages lead to a vicious cycle of rising consumer prices and labour costs. One of the biggest reasons is the continued digitalization of the economy. While innovation creates new industries and jobs, there is increasing support for the view that the benefits are not evenly distributed.
Monetary policy has a large role to play as well. Clearly, the U.S. Federal Reserve is letting the economy run hot, emphasizing that 2% is no longer a ceiling but an average inflation target. We are closely monitoring the situation as aggressive policy stimulus combines with rapid economic growth like almost no other time in history. Overall, we expect inflation to peak this year, but remain elevated for years to come.
One point worth making is that even if the pace of price increases slow, prices are still going up in the long run. That means the best time to invest is yesterday, as the adage goes. Cash that generates no income is not offsetting inflation. We continue to use our portfolios’ flexibility to tactically allocate assets within our risk budgets and protect our investors’ purchasing power. As investors, asset price inflation is one type of inflation you should welcome.
By Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer
Marchello Holditch, CFA, CAIA, Vice-President and Portfolio Manager, CI GAM | Multi-Asset Management
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