Despite reports of rising commodities prices, investors shouldn’t be overly anxious about inflation, says Luc de la Durantaye, vice-president of global asset allocation for CIBC Asset Management and manager of the Renaissance Optimal Inflation Opportunities Portfolio.
Prices have been steadily increasingly, but there’s a difference between headline inflation and core inflation. And you need to help your clients make the distinction.
Consider this: core inflation has remained stable in both Canada and the U.S. In late August, the rate in Canada fell to 1.7%, within the acceptable 1%-to-3% level set by the Bank of Canada.
Headline inflation, on the other hand, continually fluctuates above and below core inflation. It’s not adjusted to account for seasonality or volatile food and energy prices, for instance. It’s less reliable and is most often considered on a year-over-year basis.
Real, long-term inflation is driven by factors such as wages and general economic demand. Since the North American economy is still sluggish, says de la Durantaye, no major spikes have been recorded.
So, with this distinction in mind, he says to remind clients that rising commodity prices only affect headline inflation. As a result, central banks don’t often respond to sky-high commodities prices with monetary stimulus or rate hikes.
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“Rising commodity prices have the same effect on inflation as would a tax on consumption. The side effects are temporary, since the demand for the commodity declines as prices rise. Consumers are forced to curb their habits and spending, creating an economic slowdown that pushes down the price of the commodity over time.”
Equities will also start to improve in the short-term, says de la Durantaye, as investors put aside their fears. The main problem now, he says, is rates have been pushed so low that investors are searching far and wide for yield.
But, if the European and Chinese economies improve, interest rates will also rise.
And rather than signaling the return of inflation, that “would point to [economic] tensions easing. Investors could move away from safe havens and back into more profitable growth assets,” says de la Durantaye.