Inflation Scare Across North America
How is the Canadian Economy handling and projecting the high inflation rate situation?
In the past months, the annual inflation rate in Canada increased further than anticipated, and Statistics Canada figures indicate that it could proceed to increase in the coming months looking at the low levels reached in the first COVID-19 lockdowns last year.
According to the financial information group Refinitiv, last month’s reading relates to an annual increase of 0.7% , exceeding the forecasts of analysts who estimated 0.9% this year.
These large numbers were anticipated by some, and they expect them to go even higher. An economist at BMO Capital Markets expresses his predictions by saying “In the next few months, with the run-up in oil prices in particular … and when we compare ourselves to what happened a year ago, we are going to get some very big inflation numbers,”
In January, two out of the three primary inflation indicators shifted, for all staying under target. The common measure that the Bank of Canada claims is the best indicator for the poor performance of the economy was stable at 1.3%, whereas the trim was 1.8% and the median was 1.4%.
The rise in January was driven through increasing gas prices, which Statistics Canada states grew by 6.1% in comparison to December.
Even with the starting signs of demand volatility reaching international markets, as the pandemic began to spread, gas prices were still 3.3% lower than what they were in January of last year. Statistics Canada reports that the CPI (Consumer Price Index) last month rose by 1.3% compared to a year ago, excluding these gas prices.
The CPI hasn’t hit over 1% since 2019, where it was 2.2%. Ever since, annual inflation has scrapped to 1% once prior to January, as it hit the mark this past November due COVID changing everyone’s spending habits.
Analysts look for continuing patches of cost deflation in January inflation estimates, including airline services, regardless of the quick growth speed in 2021.
There are hopes that the upcoming months will push back annual inflation. Royce Mendes, a Senior Economist at CIBC states that “We all know what the game plan is in this country, and it’s that both fiscal and monetary policy-makers need to continue to provide support for the Canadian economy, and the economy is going to be limping ahead until we can put the virus behind us for good,”. He also believes that the skew may be so poor it “will be rendered almost meaningless,”.
How is the U.S Economy handling and projecting the high inflation rate situation?
Since 2008, the word inflation has always been a nightmare for bond investors and equity traders, especially after the recession. Inflation is not the best news to hear when it comes to bond traders and investors as it cuts the value for future investment gains.
For equity traders however, things can be less awful as the ability to squeeze out profits from higher prices is possible. This is very common to happen in the stock market where there are cases of higher pressures driving up stock prices. Over the last few decades, the most persistent and profitable companies during high inflation periods are energy shares from a study shown by Ned Davis Research shows.
The rise in inflation is set to occur along with the post COVID-19 economic spark as more business especially traditional brick and mortar companies will be back in business allowing for profits to rise. However, the rise in inflation is threatening to reverse the four-decade decline in interest rates for the United States which is creating a rush to protect trillions of dollars of debt-market investments, according to Bloomberg.
Over the last few weeks and months, the initial signs of inflation and shifts have begun where firms and companies are moving their money into loans as well as offer floating interest rates. The difference with floating-rate debt is the benchmark rate as that goes up which helps preserve value.
With COVID-19 coming to a slow down as cases are falling and the continuing fiscal stimulus on the rise, there is more nervousness and chaos with inflation being an issue. That means pricing power is set to become “an intriguing alpha generator” due to the wide variance in how companies cope with it, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist (Financial Post). There is no official prediction on the type of inflation unlike the type that caused severe issues for the United States economy almost 50 years ago.
The taper-tantrum was caused in 2013 where the Chairman of the Federal Reserve Ben Bernanke made suggestions that the central bank could slow the pace of the monetary stimulus which have had global bonds under a lot of pressure at the start of the year. When ranked by investment style, cyclical value stocks companies whose sales are more sensitive to economic swings and usually trade at relatively cheap valuations tend to do better when inflation runs high, Ned Davis Research said.
The main gain came from crude oil this year as there was the confidence in a global economic recovery. The performance of crude oil correlated directly with the stock market with energy companies such as Exxon Mobil Corp (NYSE: XOM) sky rocketing this year. The oil industry was the main contributor to the gain of the S&P 500 in 2021.
The so mentioned “bubble” for many companies over the last year is causing a speculation where companies seem to be going towards a down trend. With such activity, the scare of high inflation that may bring a sudden drop any moment to the stock marketing is fearful. However, many analysts expect for this to not be as big of a problem, since there are more issues to worry about. Furthermore, with the economic recovery expected to happen, things may shape up by the time there would be official impact with the stock market flow. As companies are expected to perform and neutralize the economy overtime from the pandemic, the market may show significant signs of recovery in the coming months.
Will high inflation rates be something people should worry about, or will things settle over time?
Let us know what you think!
Written by: Ali Malik and Karthik Ganapathiraju