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The TSX, Canada’s main stock index has been setting a number of record highs, while U.S markets notch up some of their best weeks in more than a year. The bullish sentiment comes on the heels of hawkish sentiment from the U.S Federal Reserve after it raised interest rates and said it hopes for a ceasefire to the war in Ukraine.

On Monday, March 21, the TSX hit an intra-day record high of 21,910.27. As of this writing the Toronto market is up 3.8% over the last week, 3.6% in 2022, and 16.6% year-over-year on the strength of commodities and financials.

Can The TSX Keep Going Higher?

With the war in Ukraine, many energy, metal, and agricultural products are in short supply. This is a plus for the TSX; the S&P/TSX Composite is weighted 25% to energy and materials. Canadian banks are also doing well, and the Financials sector makes up 32.17% of the market—all of which helps explain why the TSX is leading North American stocks.

That said, U.S. stocks also continue to do well, posting their best week since November 2020. The caveat of course, is that unlike the TSX, which is currently the North American powerhouse, U.S stocks remain underwater. The S&P 500 is down 6.9% year-to-date while the Nasdaq remain in correction territory down 12.2%, and the Dow Jones Industrial Average has lost 5.4% of its value.

Despite solid investor optimism, ongoing volatility remains, most notably, inflation, the war in Ukraine, and ongoing pandemic.

What Is Canada’s Inflation Rate?

Canada’s inflation rate surged to a 30-year high of 5.7% in February, as the price of everything from gas to groceries to housing scorched higher. This is up from 5.1% in January and higher than the 5.5% that economists were calling for.

Gas prices were a big reason for the increase, as the war in Ukraine rages on for its fourth week. This helped push up retail gasoline 6.9% in February and up almost 30% year-over-year. Keep in mind, this doesn’t include the recent surge in crude oil prices from $106.78 per barrel on March 1 to $130.50 per barrel on March 7. Oil prices have retreated a little but it is still trading at over $103 per barrel.

Food prices have climbed at their fastest pace since 2009, up 7.4%. And shelter costs were up 6.6% over the last year, the fastest increase since 1983.

Out of control inflation might explain why the majority of Canadians (66%) feel like we’re in the depths of a recession; 69% of Canadians are saying they are stressed about the rising cost of food and 56% are saying rising gas prices are weighing them down.

Canada’s inflation rate continues to soar in spite of the Bank of Canada raising its key lending rate to 0.50% from a record low of 0.25% in early March. By raising rates, the Bank of Canada and other central banks are looking to slow down red-hot inflation without undermining economic growth.

The central bank is expected to increase its key lending rate a number of times over the coming months. But is it too little too late?

How High Will Canadian Inflation Go?

The goal of the Bank of Canada is to keep inflation “low, stable, and predictable” at a midpoint of two percent of an inflation-control target range of one to three percent. It has clearly failed on this mandate.

February’s 5.7% reading was the 11th consecutive month in which inflation was above the Bank of Canada’s one percent to three percent control range.

It’s obvious the Bank of Canada will need to raise rates to bring inflation down, but there’s more to it than simply “raising rates.” The last time Canada faced this kind of inflationary pressure was back in the 1970s with rates breaking through 13%.

No one expects rates to get to those nosebleed levels. Economists expect inflation to peak this spring at six percent. The unprovoked attack on Ukraine, which has exacerbated the prices for oil, wheat, and other precious metals, could mean we will be facing higher inflation for a lot longer. These factors will limit how much control central banks have over inflation and how much it can fall in 2022 and 2023.

To bring inflation down to the two percent range, most analysts now expect the Bank of Canada to raise its key lending rate four or five times in 2022 to 1.25% or 1.5%. Scotiabank is the most bullish predicting a year-end policy rate of 2.5%.

Inflation peaking at six percent certainly sounds better than 13% and, relatively speaking, sounds manageable. But already Canadians are feeling devastated by the current inflation rate.  Moreover, getting inflation down to two percent will take time.

U.S. Federal Reserve Chair Jerome Powell said recently he expects inflation to fall near two percent, but that target will not be reached for another three years and that a so-called “soft-landing” may be difficult to achieve.

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