Inflation isn’t currently a threat, since the latest headline in core inflation came in at the low 1% range.
And over the last 21 years—since the Bank of Canada implemented inflation targeting—headline inflation has averaged 2% here in Canada, says Jeff Waldman, first vice president of global fixed income at CIBC Asset Management. He manages the Renaissance Short-Term Income Fund.
That’s right on target, he adds, while U.S. inflation has averaged 2.6% over the same period.
And while there’s been concern over high food prices due to the drought and poor crop yields in the U.S., he’s not worried.
“Food prices are a relatively small component of the CPI in North America; they make up only 15% in the U.S. and 18% in Canada,” says Waldman.
Food prices impact developing countries more, because they make up 30%-to-50% of the CPI.
Further, rising commodity prices in the food spectrum is only one part of the whole picture. There have been significant price declines in other commodities in the past year, including metals, coffee, sugar and natural gas.
Declines have been 20% to 30% in some cases. This movement offsets any rising food prices, so he doesn’t see inflation as a significant risk that’ll propel interest rates higher.
Like the Bank of Canada, he doesn’t expect inflation to hit its 2% target rate until the end of 2013.
As the year progresses, though, he says active managers should still monitor the possibility of rising interest rates from higher inflation. If indicators point to rising rates, they should reduce the average term-to-maturity of their portfolios.
“Another factor to consider when managing the portfolios and offsetting potential rate risk is the allocation to corporate bonds,” he says. “The additional spread bonds offer mean they act as a shock absorber to any bumps down the road as a result of rising rates.”