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There’s no denying inflation is here. But is it here to stay?

24 August 2021 by National Bank Investments
NBI Monthly Edition – September 2021

Whether you’re shopping around for household appliances, in the market for a new or used car, or at the supermarket picking up basic essentials, you’ve probably noticed prices have gone up. If so, you’re not alone.

With prices trending higher, inflation has become a dominant narrative over recent months. On one end of the spectrum are those that believe we are moving towards a prolonged period of inflation. On the other end are those that believe price pressures are temporary. While there is no denying inflation is here, how likely is it that it is here to stay?

Why this is probably a temporary setback

1. Credible policymakers are suggesting inflation is “transitory”

Both the Federal Reserve and Bank of Canada believe what we are seeing is transitory. Price pressures are likely attributed to the COVID-19 pandemic and the reopening of economies. As such, policy changes are not warranted at this time and the supply-demand imbalances that are causing inflation are expected to stabilize in the near term.

2. Market participants and consumers both expect inflation to stabilize

Analyzing the expectations of economic agents such as market participants and consumers is another way to determine if inflation is here for the long haul.

The reasoning is simple. If a majority of consumers are confident that long-term inflation will remain stable, any abnormal rise in prices should incline people to delay their purchases (when possible) until prices stabilize. Conversely, if a majority believes that prices are bound to continue to rise significantly faster, consumers are more likely to accelerate their purchases. 

For now, measures of expected inflation suggest both parties are leaning toward the transitory rise scenario, as the rate expected beyond the next year is  consistent with the Federal Reserve’s long term inflation target (see charts below).

To conclude

While inflation is trending above central bank targets in the U.S. and Canada, recent data seems to suggest it may be slowing. As such, while there is no denying inflation is here, there are no reasons to believe it will be "dangerously" higher. Regardless of what will happen, the best way to hedge your portfolio against inflation is to diversify your holdings across a wide range of asset classes!

 

 

Legal notes

The information and opinions herein are provided for information purposes only and are subject to change. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

NBI Funds and ETFs (the “Funds”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with investments in investment funds. Please read the prospectus of the Funds before investing. The Funds are not guaranteed, their values change frequently and past performance may not be repeated. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. NBI ETFs do not seek to return any predetermined amount at maturity.

© 2021 National Bank Investments Inc. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank Investments Inc.

®NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under license by National Bank Investments Inc.

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