Portfolio Corner: It’s Time For Perspective

Getting Back To Normal

By Steven Mayo

To start 2022 there is much discussion about elevated inflation and rising interest rates.

In both cases they are working their way back to normal after a period of ultra-low levels which began March 2020. So, it’s time for some perspective.

Interest rates had to begin to rise following the pandemic response instituted by Central Banks, which saw rates lowered to 0.25%.

This was done to avoid a recession, to support the stock markets, and to generally “weather the storm”. Clearly it worked and we are past the need to stabilize.

Beginning last fall, the Bank of Canada and the US Federal Reserve telegraphed to the markets that interest rates would begin to rise in 2022. At the time of writing we expect three to four raises this year.

The new “demon” for 2022 is inflation.

For many years the benefits of technology, lower energy costs, offshore production etc. have all benefited consumers. Add to that a pandemic, when inflation actually was negative for a short time, creating a very low base for comparison.

Throughout 2021, as demand was rising, supply issues appeared.

This first appeared in the oil markets, with producers now having discipline and OPEC not substantially increasing supply to the market, resulting in higher oil and gas prices. Classic supply and demand economics.

COVID-19, government policies, labour shortages, and more, all contributed to supply constraints and pricing pressures. Then throw in chip shortages that affected manufacturing of items like cars, trucks, and appliances.

All of these things are contributing to higher inflation at one time. Inflation over a one year time period is noticeably higher.

However, many items used to calculate inflation are discretionary, such as cars, appliances, and travel and may not affect all consumers. It is the rise in staples, such as food and clothing that is not as palatable.

Economics does work in both directions.

Eventually, with higher prices comes more supply. This is where companies play such an important role to help themselves (profit motive) and consumers. With a normalized economy we should eventually see pricing pressure subside as demand normalizes and supply constraints are resolved.

For savers it’s good to see GIC rates and bond yields rising. For companies that are able to raise prices and maintain their margins, I would consider this “positive inflation”. These are the companies that investors should keep in mind to add to portfolios. Particular attention should be given to companies within the transportation and manufacturing sectors.

Consider this quote by Chester Bowles as I end my column: “Production is the only answer to inflation.” Steven Mayo is a Senior Investment Advisor with RBC Dominion Securities Inc. (Member — Canadian Investor Protection Fund). This article is not intended as nor does it constitute investment advice. Readers should consult a qualified professional before taking any action based on information in this article.