Is higher inflation on the horizon? 

Not surprisingly, Canada’s March inflation rate fell to a five-year low due to a collapse in gasoline prices resulting from the downward pressure on the value of oil. The CPI recorded a yearly rise of 0.9% versus 2.2% in February. Expect an even lower reported rate of inflation with the April reading. 

In the short term, no one will be concerned about the rate of inflation during this current economic slowdown. But as almost all Canadians know, the federal government has responded to the COVID-19 crisis by sending out cheques to many of those people affected. As a result, the deficit, instead of running at $27 billion, will easily top $200 billion. Add to that the fact that the Bank of Canada will be buying $5 billion of bonds per week (our own version of Quantitative Easing or QE) for the foreseeable future, in part to help finance the federal government’s spending plans. If, and we say if, we add to this increased money supply a much weaker Canadian dollar, we assume the risk of much higher inflation in Canada. But all three conditions, namely big government spending, QE by the Bank of Canada and a weak currency, would have to persist over a long period of time, the latter being the big unknown, to have a major impact on pushing inflation rates higher. 

One major U. S. money manager recently stated that “inflation may come in a form I haven’t seen before.” Another indicated that “inflation is a concern of ours.” Whatever the pricing environment for a basket of goods, inflation isn’t so much a factor when investing in stocks since what we are looking for is companies that emerge from this crisis with better market share and the ability to keep prices of their goods firm, something we call “pricing power.” But for our many bond investors, the inflation question is an essential part of the investment decision-making process. At this time, with such low interest rates and a return to inflation a real possibility, we prefer to keep bond maturities in the shorter end.