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by  PH&N Institutional team Sep 15, 2022

Background

Due to an unprecedented confluence of events, driven in large part by the worldwide pandemic and the war in Ukraine, the global economy currently finds itself under extreme pressure from inflation. The price of everything, from fundamental staples such as gasoline and food to various discretionary goods and services, has dramatically increased in a very short period. In Canada, year-over-year inflation, as measured by the Consumer Price Index (CPI), was at 7.6% as at July 2022, down slightly from the previous month’s reading of 8.1% – its highest recorded level since 1983.

Needless to say, the resulting short-term fallout has been extreme, as well as broad in its reach. Capital markets are in upheaval and central bankers as well as politicians around the world are grappling with difficult trade-offs in an attempt to maintain stability and confidence. And perhaps most difficult to ignore, nearly all individuals are feeling the pinch on household budgets. Under these circumstances, an institutional investor would be hard pressed to disregard (if not worry about) the implications of this backdrop on future investment outcomes for the assets under their care.

During moments of extreme market stress, it can be very challenging for investors to remain grounded with respect to investment policy decisions. However, as most institutional investors have very long-term horizons, it is important to consider current events from that longer-term perspective, especially before contemplating any sort of action. While current inflationary conditions could end up having an impact on long-term outcomes, how and to what extent can only be assessed if we consider the subject from that particular viewpoint.

The purpose of this article is not to put forward any sort of prediction as to how inflation will ultimately play out, a challenging task to accomplish with a high degree of certainty in any circumstance, much less given the state of flux in which the world currently finds itself. Rather, our objective is to situate current conditions in relation to history for some important context, and then to consider what could happen over a longer-term horizon under different illustrative scenarios. We believe this will offer a helpful perspective for investors as they think about their investment policies in the face of this future uncertainty. Finally, we highlight how long-term inflation might not affect all investors equally, meaning that the potential need to make changes to investment strategy will vary between different institutions.

Read the full piece here.

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PH&N Institutional takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. The views and opinions expressed herein are those of PH&N Institutional as of the publication date and are subject to change without notice. This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any service.

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PH&N Institutional is the institutional business division of RBC Global Asset Management Inc. (RBC GAM Inc.). Phillips, Hager & North Investment Management is a division of RBC GAM Inc.

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