Threatened by inflation?
Despite a slowing world economy, inflation has become a threat in a number of countries, including Canada. But, while attention is focused on monthly inflation figures, it’s important to understand what they mean, and how they affect your finances.
Headline vs. core inflation. The overall or “headline” inflation figure reflects changes in the Consumer Price Index (CPI); the “core” inflation figure strips out volatile elements such as energy and food, giving a clearer picture of economic conditions.
However, these more volatile items also contribute to total consumer costs.
The effects. Prices for fuel, food, and transportation have been rising recently. However, costs for many consumer goods have been falling for years, and wage inflation is relatively tame.
Interest rates. The Bank of Canada attempts to keep core inflation within a band of 1% to 3% by controlling interest rates. These changes affect borrowing rates and can slow or accelerate the economy, resulting in new inflation trends.
Your portfolio strategy. Gold and commodities can offer some shelter for investors in an inflationary environment. Real-return bonds also provide an inflation hedge, as they promise a return over and above the CPI rate. It’s important to keep in mind that equities have traditionally outpaced inflation over the long term.