Inflation has exceeded the Bank of Canada's range for six straight months. September's consumer price index rose 4.4%, which is the highest reading since February 2003. There is a debate going on whether inflation is transitory or permanent. I think this argument oversimplifies the complex issues with inflation. There will no doubt some inflation that will be permanent and some that will be transitory.

 

There are some inflationary issues that will take longer to sort out such as the underinvestment in energy supply and raw materials. Some that should see a shorter response time are supply issues such as chip shortages and port throughput.

 

How does inflation affect THE markets?

 

Negatives – earnings pressure because of higher costs and multiple compression. Companies trade at lower price-to-earnings ratios because of the higher discount rates.

 

Positives – energy, material and financial companies should benefit because higher inflation generally leads to an increase in the price of commodities and steepens the yield curve.

 

Neutral – media and entertainment, technology and healthcare companies are dominated by intellectual-property. They rely more on IP than they rely on producing tangible goods. Therefore, inflationary pressures do not have the same impact on these companies compared to those who have to produce tangibles.

 

Overall, we believe the biggest inflation risk is a fast increase in interest rates which could cause a decrease in price-to-earnings multiples for companies. Let's make sure we keep one eye on the US 10-year treasury!

 

I have also included a piece from our CIBC Economics Team entitled "My word is my bond".

 

As always if you have any questions please feel free to give us a call anytime.

 

Have a great weekend.

 

Milan