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June 16, 2021

Running Hot – Will the Inflation Run Last?

Consumers have only had to look at the gas pump or local grocery store the past few weeks to notice the increase in inflation and consumer prices. It seems like everything has gone up – consider:

  • The U.S. consumer price index (excluding food and fuel) jumped by the most since the 1980s.
  • The Canadian inflation numbers that followed suit were comparably high.
  • Resources from cars and lumber to copper and oil have gone up in price.
  • Producer prices – the input costs of components for goods producers – spiked.
  • Wage inflation – a leading indicator of consumer price inflation – is accelerating.


The good news is our portfolios have benefited from exposure to inflation-sensitive areas like resources and other real assets, as well as underweight exposure to fixed income. Now the big question is – will this inflation be temporary as the U.S. Federal Reserve suggests?


What drives inflation?


Before we answer the pending question, let’s analyze the driving forces behind inflation:

  1. Scarce goods – The shutdown of manufacturing and fast rebound have caused shortages of almost everything. In some cases, production can be ramped up quickly, but in other areas, like semiconductors, expanding capacity will take time if new factories need to be built.
  2. Scarce workers – Employment reports show labour shortages are widespread. Some of this is due to unemployment benefits that are set to expire. Labour shortages should also recede as children return to school and health concerns subside as more people are vaccinated.
  3. Excess demand – It’s clear pent-up demand from lockdowns and excess savings (either from stimulus checks or reduced spending habits) are feeding demand. While unemployment benefits may stay elevated compared to the past, it’s unlikely broad stimulus checks will continue indefinitely. The focus of major spending programs is shifting to things like infrastructure, which are still supportive of inflation. 


How long will this run last?


While the price pressures from scarce goods and pent-up demand are clearly transitory, wage gains could drive things further. However, it’s hard to imagine a sustained wage-price spiral where increasing wages lead to a vicious cycle of rising consumer prices and labour costs. One of the biggest reasons is the continued digitalization of the economy. While innovation creates new industries and jobs, there is increasing support for the view that the benefits are not evenly distributed.


Source: Federal Reserve Bank of St. Louis as at January 1, 2021


Monetary policy has a large role to play as well. Clearly, the U.S. Federal Reserve is letting the economy run hot, emphasizing that 2% is no longer a ceiling but an average inflation target. We are closely monitoring the situation as aggressive policy stimulus combines with rapid economic growth like almost no other time in history. Overall, we expect inflation to peak this year, but remain elevated for years to come.


One point worth making is that even if the pace of price increases slow, prices are still going up in the long run. That means the best time to invest is yesterday, as the adage goes. Cash that generates no income is not offsetting inflation. We continue to use our portfolios’ flexibility to tactically allocate assets within our risk budgets and protect our investors’ purchasing power. As investors, asset price inflation is one type of inflation you should welcome. And with our managed solutions, you can make sure you don’t miss out.

About the Author

Marchello Holditch

Marchello Holditch, CFA, CAIA

Vice-President and Portfolio Manager
CI Multi-Asset Management

Marchello Holditch, CFA, CAIA, Vice-President and Portfolio Manager, oversees CI's multi-manager, multi-asset investment programs. He is responsible for managing CI’s institutional and private client multi-asset portfolios and is a member of the CI Multi-Asset Investment Committee. Previously, Mr. Holditch led CI’s portfolio manager research and oversight function, where he was responsible for evaluating the investment managers of all CI funds. Prior to joining CI, Mr. Holditch worked at a major global consulting firm, where he assisted a wide variety of institutional clients with risk budgeting and asset liability modelling, as well as investment manager research and selection. He holds an Honours Bachelor of Mathematics degree in actuarial science from the University of Waterloo and is a CFA charterholder.

About the Author

Alfred Lam

Alfred Lam, CFA

SVP, Head of Multi-Asset
CI Multi-Asset Management

Alfred has more than 18 years of experience specializing in portfolio design, asset allocation, manager and fund selection, and risk management. While at CI Global Asset Management, Alfred has brought unique ideas and processes to the management of the team’s multi-asset strategies, including a mean-reversion currency management strategy, the concept of investing in concentrated and benchmark-agnostic portfolios, and a new approach to risk management. In addition to the Chartered Financial Analyst (CFA) designation, Alfred holds an MBA from the York University Schulich School of Business, and is a member of the CFA Institute and the Toronto CFA Society.



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Published June 7, 2021.