Despite central banks’ best efforts, inflation remains too hot for anyone’s liking.
However, with gas prices moderating and raw food commodities starting to ease, CIBC’s chief economist said some relief may be on the way.
“We do think that we’re close to, if not already at, the peak for inflation,” Avery Shenfeld said.
Nevertheless, Shenfeld said there’s still “a long road ahead” when it comes to getting back to a target of 2%. Rents, for example, are still climbing and Shenfeld expects the Bank of Canada will continue to raise rates in order to slow economic growth and ease the pressure on consumer prices.
As a result, rates will likely rise another three quarters of a percent, Shenfeld said, bringing the overnight benchmark interest rate to roughly 3.25% — with the possibility of moving as high as 3.5%. “That should be enough to slow economic growth in Canada and help moderate the inflation environment into the coming year,” he said.
Whether or not that occurs in one lump in September depends on how fast the Bank of Canada wants to get it there.
It’s a similar story in the U.S., Shenfeld said.
In July, prices for gasoline fell and other goods that had previously soared finally started to taper out. Conversely, rents continue to climb in the U.S. as well, so according to Shenfeld, “they’re not out of the woods yet.”
What that means for investors is that if inflation doesn’t come down fast enough, central banks will continue to raise rates — with the possibility of reaching as high as 4%. In the past, that often has been the cause of an outright recession, Shenfeld said.
For this reason, he recommends investors balance risks in their portfolios so they don’t have too many assets in equities that depend on a rapidly growing economy, or too much exposure to sectors that are hit hardest in a recession.
That said, it also creates some opportunities. “Plain vanilla” investments such as five-year GICs are now paying a reasonable rate of interest, Shenfeld said, and companies that aren’t as tied to the business cycle are now paying a reasonable dividend. Both scenarios offer reasonable opportunities for investors in this uncertain inflationary environment, he said.
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