Thought of the Day - May 20 2021 - Inflation, Inflation and Inflation

A couple of months ago I remember watching a video from Australia that went through all the categories of consumer spending giving examples of how much the cost of meat, produce, rentals, taxation, building materials, luxury goods, real estate etc. has increased significantly in the last quarter, coming to the conclusion the only people who have not noticed the massive increase in cost is the Australian Bureau of Statistics (ABS). I also remember thinking, this sounds just like my reflections on Canada from last December ( Thought of the Day - December 20 - By the Numbers ). That said, it made me realize that in 2021 inflation management is going to be an issue from many G20 countries.

Countries are working very hard to convince their populations that their spending power has not been massively eroded due to COVID measures. However, while there is a lag between: the cost increases in specific items, the cost increases in products and services, and finally, the cost increases being reflected in government-reported CPI figures.

But now the cat is out of the bag. The annual inflation rate just announced for Canada is 3.4%. Year-over-year inflation rose at its fastest pace since May 2011. To be fair it is a little overstated as a year ago the effect of the first wave of the pandemic had been deflationary - remember gas was free a year ago ( Thought of the Day - April 22 - Gas Is Now Free ).

I went through the Stats Canada report for April 2021. Prices rose in every single category over the past year. Guess what the single thing highlighted in the report that is costing less: cellphone plans - while we still have some of the highest prices in the world, at least, unlike the US, they are not going up.

For comparison, the table reflects the most recent reported inflation rates (March or April). Note Canada (3.4%) and the US (4.2%) increased the most as of late.

There are three types of inflation:

• Monetary Inflation - increasing the money supply (a.k.a. Quantitative Easing) can devalue the currency;

• Asset Inflation - demand for stocks, crypto, luxury items, property, commodities (in part driven by stimulus cheques and cheap debt);

• Consumer Price Inflation - increasing prices of goods and services.

And, as the graphs from the Bank of Canada illustrate, we have all three to contend with.

Note: M1 is cash and near cash. The monetary base is M1 + less liquid deposits, securities and funds.

The Bank of Canada has already made mention it may adjust interest rates in the second half of 2022, rather than waiting until 2023. The result, a stronger Canadian dollar and a potential increase in CPI due to mortgage cost increases.

It was hoped that Canada's inflation rate would stay lower than our GPD growth (forecast at 2.7% at the beginning of the year). With price pressures on raw materials, that also benefits Canada, it is starting to look like both will be getting revised upward. The question is simply by how much?

Cheers

Cliff