What’s Going on With Inflation? 3 Reasons Why It’s Here to Stay
By Shamez Kassam, CFA®, MBA
It’s official. After months of being told the current inflation crisis is transitory, the Bank of Canada stated that high inflation rates will continue to rise into at least Q2 of 2022. (1) What may have seemed like a slight inconvenience at first is now becoming a much larger issue as people watch the value of their money degrade right before their eyes with no clear end in sight.
The best way to assess the situation is to take a look at the factors surrounding why inflation is rising. The COVID-19 pandemic was unlike anything the world has ever seen. The entire global economy came to a complete standstill for the only time in modern history. It’s to be expected that the rebound from such a once-in-a-lifetime event will be just as enigmatic as the event itself.
That’s not to say that the future is bleak, but rather to temper expectations so that we can properly plan for the future and mitigate potential risk. Here are some reasons why inflation has increased in the past year and what it means for your long-term purchasing power.
What Is Inflation?
According to Investopedia, inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. (2) It can be characterized as persistent or transitory. Transitory inflation (3) is temporary and happens when supply doesn’t meet demand. If left unhandled, it can turn into persistent inflation (4), which results in a more permanent increase in prices due to a continuous mismatch in supply and demand.
The Consumer Price Index (CPI) is a common measure of inflation. The most recent CPI report from November 2021 shows that Canada’s inflation rate reached a whopping 4.7% (5), after hitting an 18-year high in September. (6)
Why Is Inflation So High?
To better understand if inflation will last, let’s take a look at the factors contributing to its rise.
1. Surging Customer Demand
Throughout 2021, we have seen a surge in customer demand for both raw materials and consumer goods and as COVID-19 restrictions begin to lift, this increased demand may lead to higher prices for goods and services. In fact, according to Reuters, demand for some goods is so high that products are selling out even before they arrive. (7) A rise in demand coupled with a lack of product results in higher prices and, therefore, inflation.
2. Supply Chain Headaches
If there’s one thing that’s been in the news even more than inflation concerns, it’s supply chain disruptions. Since the vaccine rollouts and slow return to pre-pandemic life, companies have struggled to keep up with manufacturing and distributing goods. This is because many distribution centers cut their hours when the global economy came to a halt in anticipation of a huge drop in demand for consumer goods. The drop in demand, however, did not come.
As people across the globe spent days, then weeks, then months in their houses, demand skyrocketed for exercise equipment, home goods, and office supplies. Factories increased their output, but the distribution chains have struggled to get everything where they need to be.
Additionally, the increased production has also caused a shortage in raw materials, thereby exacerbating the gap between overall supply and demand for even basic items. As demand continues to outpace supply, prices are driven higher and higher.
3. Rising Oil Prices
In addition to surging customer demand for items that are blocked by supply chain issues, Canadians are also experiencing record-level inflation rates thanks to skyrocketing transportation costs, including rising oil prices. According to Financial Post, the benchmark price for Alberta oil averaged $45.13 USD per barrel in January 2021 and $64.78 USD per barrel in October 2021. (8)
This increase makes transporting goods even more expensive, and that increase is then passed along to the consumer.
How Long Will Inflation Last?
It’s tough to say exactly how long inflation will last, but based on these three variables, it could be a couple years before we return to the target rate of 2%. As our global economy shifts, trade alliances change, and we experience the ongoing effects of the COVID-19 pandemic, it seems to be an issue that will persist for the foreseeable future.
Let Us Help You Protect Against Inflation
As we approach the new year, it’s understandable to be concerned about inflation. Many of us are not only worried about how inflation will impact our current finances, but also about how it will affect our long-term goals. That’s why it’s so crucial to be realistic about how long inflation could impact your financial plan.
At Northfront Financial, we have the tools and expertise to guide you through a long-term inflationary environment. We will review your investment and retirement plans for proper diversification and risk tolerance levels, ensuring you are properly protected no matter how long this increased inflation lasts. Call 403-571-8960 or email email@example.com to review your plan today.
About Northfront Financial
Northfront Financial, based in Calgary, Alberta is a boutique full-service financial planning firm serving professionals and business owners. We pride ourselves on being a different kind of investment firm. This stems from our humble roots, entrepreneurial spirit, and a culture of integrity and professionalism. Our goal is to offer the best investment products, services, advice, and ideas the financial industry has to offer from our experienced team, which includes individuals with the Chartered Financial Analyst® (CFA®), Chartered Investment Manager (CIM®), and CERTIFIED FINANCIAL PLANNER™ designations. To learn more about Northfront Financial and how we can help you, visit our website and schedule a complimentary appointment.
(5) https://tradingeconomics.com/canada/consumer-price-index-cpi#:~:text=Consumer%20Price%20Index%20CPI%20in%20Canada%20averaged%2064.67%20points%20from,points%20in%20January%20of%201950 (6) https://www.reuters.com/business/canadas-annual-inflation-rate-hits-44-september-highest-since-2003-2021-10-20/