Inflation is on the rise in Canada. In May 2021, according to Statistics Canada, the rate of inflation hit 3.6% which is the highest level in a decade.
On the one hand, that means the cost of living is going up – housing, gas, food, consumer goods and all the other necessities of life will cost more relative to income.
But for investors, there is another layer of concerns to fear.
High inflation, if it continues, could require the Bank of Canada to act decisively to contain it. The Bank of Canada Governor recently requested more authority from the Prime Minister to run the economy hot.
The Governor may focus on labor-market metrics or putting more emphasis on the Bank of Canada’s allowable range for inflation beyond the 2% target. That could give him some more flexibility to address under-performance in the economy at a time when other central banks are doing the same.
The options that the Bank of Canada could be considering include: maintaining the status quo – keeping prices stable and keeping inflation within a range of 1% to 3% as much as possible – or adding explicit labour-market metrics or language into the mandate to shift the focus to a full labour-market recovery.
Any changes along those lines could mean the end of the low interest rates that have supported the purchase and investment in stocks, bonds and property.
The future of inflation is currently unclear. Most experts continue to say there is nothing to worry about and point to the fact that central banks have consistently over-forecast inflation and under-shot their inflation targets over the past decade. Jumps in inflation are usually transitory.
But, on the other hand, the rising rate of inflation is without doubt something for investors to keep an eye on as it will have reverberating impacts on borrowing rates and investing options.
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