Everywhere I go, every channel I listen to, it seems all everyone is talking about is Inflation. And it is true, the data right now is ugly. The annual inflation rate in Canada went up to 4.4% in September, this is the highest inflation rate since February 2003.

As prices continue to go up on everything from transportation and gasoline to food and shelter, consumers and investors alike are starting to get worried. But Kristina Hooper, Global Market Strategist, Invesco Ltd gives investors five good reasons to remain calm and not fear the current rise in inflation.

One. Inflation is a necessary evil as countries emerge from the pandemic, especially for countries like Canada and the U.S. that provided huge amounts of fiscal stimulus to individuals and businesses throughout the crisis. It’s true, household savings are elevated, there is pent-up demand, there are labour shortages and supply chain disruptions. We are facing what seems like a perfect storm – but it is better than still being in the depths of the pandemic.

Two. Although it seems it is going to take a bit longer to get through it, there is light at the end of the tunnel. Most people have come to realize that inflation will be here for a while, Hooper believes it will peak mid-2022 and then start to recede. There are many reasons for the elevated inflation, and some, like pent-up demand will dissipate sooner than others, but the general trend should start to improve in the latter half of 2022.

Three. Tolerant central banks. In Hooper’s view, the U.S. Federal Reserve (Fed) will not overreact to the inflation data. The Fed recognizes that the factors causing high inflation will not easily be remedied through aggressive interest rate hikes. Raising interest rates will not force people back into the workforce or get ships unloaded in the port of Long Beach any faster.

Four. Longer-term inflation expectations remain relatively well-anchored. Consumers seem to understand that although inflation has spiked in the short term, over the long-term it will return to normal levels (between 2-3%).

Five. Inflation has not negatively impacted company profits. Companies are talking a lot about inflation, but it has not had an impact on their earnings. The net profit margin for S&P 500 companies in the third quarter, thus far, is 12.9%, which is near a record high. In addition, the fourth quarter net profit estimates are robust coming in at 11.8%. Many companies reported being able to pass increased costs onto consumers, which helps explain their healthy profit margins. While this may not be good for consumers, it is positive for equity investors.

Bottom line, inflation is expected to remain high – and may go higher as we head into 2022. However, Hooper is confident that inflation will peak by mid-2022 and that the Fed will not raise interest rates throughout the first half of the year.

As always, investors should remain well-diversified and focus on the long-term. If you are concerned about inflation and want to discuss the impact it might have on your portfolio, please don’t hesitate to contact me.

Have a great week,

Tracey  

Source: Original article by Kristina Hooper, Global Market Strategist Invesco Ltd, Invesco Canada blog posted 11-15-2021. Trading Economics website

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