Is Inflation Transitory?

Anyone who lives and works in the real economy has seen the price of goods and services rise recently, in some cases very dramatically. Bank of Canada Governor Tiff Macklem said on October 14 that global supply chain “bottlenecks are not easing as quickly as expected” and could stay elevated for a period of time. When high demand meets low supply higher prices is the result. With the rising of prices and the fall of the purchasing value of money you get inflation. Many economists are certain that inflation is transitory, meaning that it won’t be long-term. If you’ve been reading the news you’ve probably seen mention of this but the question is how long is “transitory”?

Several elements of this “transitory inflation” are things like supply chain, commodity prices and high consumer demand. Some economists feel that these issues will resolve themselves over the next 12 months, however we would caution that this seems overly optimistic. As anyone who’s tried to have work done to their home or ordered a major appliance in the last 12 months know that delivery is almost never on time. US inflation accelerated in September to its highest rate in over a decade, with labour and material shortages impacting global prices. The US Labor Department said that the consumer-price index (CPI) rose by 5.4% from a year earlier, in unadjusted terms. Statistics Canada reported that Canada’s annual inflation rate was 4.4% in September, the highest since 2003. Passenger vehicles alone rose 7.2% from a year ago.

Another reason for caution is the underreported upward pressure on wages. Many businesses know it has been difficult to find workers of late and this has been blamed, in part on government programs that have allowed people to stay at home during the pandemic. While the purpose of these programs is to help people to not miss mortgage payments and still be able to purchase groceries, this is only part of the issue. Real incomes for entry level and mid-level work has remained low for many years. Overseas labour, automation and the “gig” economy have all been causes for low wage growth but these are by no means the only reasons. Online shopping has also kept consumer prices low, some would say artificially for 10 – 15 years. Along comes COVID and the world (especially the West) gets a reminder that our goods and services don’t magically appear at our doorsteps, but that someone had to build, package and deliver them for us.

In regards to investments, we don’t think we’re in for a crash and that a breather in the market is a healthy thing. While stock prices are at or near all-time highs, market pessimism is very high too. Markets were up ~16% in the first six months of the year and continue to climb a “wall of worry”. Markets rarely crash while pessimism is high as it implies there’s a lot of money sitting on the sidelines. It’s a good reminder to become worried when no one else is and that markets never go up in a straight line.

This newsletter has been prepared by Stephen Maser and expresses the opinions of the author and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This newsletter is intended for distribution only in those jurisdictions where RJL and the author are registered. This provides links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same privacy policy which Raymond James Ltd adheres to. Securities-related products and services are offered through Raymond James Ltd., member-Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member-Canadian Investor Protection Fund.