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Managing Your Investments in Inflationary Times

Learn about some of the basics of inflation, and why it may be a good time to revisit your financial plan.

When prices go up, money can’t buy as much as it used to, reducing purchasing power and the value of income and savings.

High inflation not only impacts your day-to-day purchases, but also your investments. This article takes a look at the basics of inflation, and why it may be a good time to revisit your financial plan.

Rising Inflation Set to Challenge Personal Financial Plans

Since the 1990s, the Bank of Canada has been focused on keeping prices stable and inflation within a range of 1% to 3%. Stable prices and predictable inflation have many benefits:

  1. They are good for the economy’s long-term health.
  2. Companies are more likely to grow and invest when they know their costs in coming years.
  3. They help everyday Canadians invest and plan with some certainty for the future.

However, investors today can’t escape the warnings about rising inflation and the impact it is having on the price of everyday products and services such as food, gasoline and household goods. Headlines announce that inflation is at a 30-year high and, at 6.7%, far higher than the Government of Canada’s long-time 2% inflation target. Furthermore, inflation has been above target for about a year now, and is expected to remain higher through 2022 and possibly beyond.

When businesses and consumers have to spend more to buy the same quantity of goods and services, it hurts everyone’s standard of living. But it is especially difficult for people whose incomes don’t keep pace with rising prices, such as pensioners and low income earners.

Unfortunately, rising inflation means the value of today’s money is eroding faster than it has in decades. And that can have short and long-term consequences that investors need to be aware of and – as much as possible – plan for.

Inflation Erodes the Purchasing Power of Money, Over Time

Inflation is a measure of how prices change over time and affect the purchasing power of money. In Canada, the consumer price index (CPI) and its fixed basket of goods and services is a widely used measure of inflation.

Try out this inflation calculator from the Bank of Canada to see how prices have changed over time.

The CPI is comprehensive and includes eight major components: food; shelter; household operations, furnishings and equipment; clothing and footwear; transportation; health and personal care; recreation, education and reading, and alcoholic beverages, tobacco products and recreational cannabis. There’s a number of reasons that inflation and the CPI are rising – especially in areas such as food, furniture, housing, autos and gas. These include the following:

  • Bank of Canada bond purchases, record low interest rates and government spending and stimulus have helped inject more money into the financial system.
  • The global economy has been disrupted by staff shortages, unfavourable weather events, supply chain issues and bottlenecks, and shortages of raw materials, leading to higher prices being passed onto consumers.
  • The war in Ukraine has caused prices for oil and other commodities to rise.

According to a recent statement by the Bank of Canada, price increases have become more pervasive. To help fight inflation, the Bank of Canada began what is expected to be a series of interest rate increases in March 2022. In general, higher interest rates encourage saving and discourage borrowing, spending and inflation.

As the Bank of Canada takes measures to slow inflation, it hopes to allow the economy to remain resilient, create jobs and resolve supply chain bottlenecks. The Bank recently acknowledged, however, that persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards. The longer inflation and interest rates rise and stay higher, the more they impact investors’ ability to reach their financial goals and maintain their desired lifestyles.

Stick with the Plan

Generally, the value of money kept under the mattress, in low interest bank accounts or as cash will erode over time as prices rise due to inflation.

Naturally, investors may become nervous when watching inflation rise and the relative value of their cash and certain investments fall.

They may look to the past, to see which investments and sectors have outperformed during previous inflationary periods.

However, many of these investments can be risky and investors should exercise caution when buying them and past market performance isn’t always applicable today. As high as inflation is right now, it may be temporary. As we move into 2023 and beyond, inflation may actually start falling as higher interest rates, improved supply chains, reduced government spending and normalized labour markets and geopolitics begin to alleviate inflation’s key drivers.

As always, it’s important to make investment decisions according to your risk profile, time horizon, and financial circumstances.

Work with a Registered Advisor

In times of uncertainty in the world economy and capital markets, it’s a good idea to revisit your financial plan or roadmap. You might also consider working with a registered investment advisor. Registered advisors can help design an investment strategy that can reduce the impact of inflation and balance your risk tolerance and investment objectives.

For those who are retired or on a fixed income, it’s especially important to regularly invest with periodic market volatility and inflationary pressures in mind. Such investors have a number of options available to help deal with rising inflation, if required, such as reduced spending or reduced withdrawals from their investments. Again, a registered advisor can help.

For others who don’t have an investment advisor but want to meet with one now to review their investment needs and develop a personalized financial plan, advisors and financial planners are widely available at BC banks, credit unions, investment dealers, financial planning firms and more. Visit our Informed Investing page to learn more about the role of an advisor and perform an advisor background check in four easy steps.

While today’s inflationary environment may not be cause for dramatic changes to your portfolio and financial plan, now may be a good time to revisit and review them.

Report a Concern

If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Contact Centre at  604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.

InvestRight.org is the BC Securities Commission’s investor education website. Subscribe to receive email updates from BCSC InvestRight.

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