Canada’s inflation rate soared to its highest level in almost 20-years in October, juiced by pandemic-related supply and demand challenges, supply chain disruptions, and higher energy costs. While inflation has resulted in the cost of virtually everything to climb, which is negatively impacting the household finances of everyday Canadians, many Canadian stocks actually outperform U.S. equities in inflationary periods.
Should I Be Concerned about Inflation?
Statistics Canada announced that the Consumer Price Index, which measures the price of a weighted average of consumer goods, surged 4.7% in October from a year earlier. This tops the frothy 4.4% increase in inflation from September. The 4.7% reading is the second highest monthly increase since October 1991, when inflation soared 5.5%.
Energy prices were up 25.5% year-over-year. That increase comes mainly from a rise in gasoline prices. Compared to last year at this time, Canadian consumer are paying 41.7% more for gas. Over the same time frame, natural gas prices rose 18.7%. Similarly, the cost of fuel and other fuels has advanced 48.1%.
If you want to buy a vehicle, expect to pay 6.1% more. The increase is being blamed in part on the global shortage of semiconductor chips.
Grocery prices are also soaring, with meat prices up nearly 10%, bacon prices have jumped 20.2%. Labour shortages have slowed production, ongoing supply chain issues, and rising prices for livestock feed is being passed onto consumers.
What Kind of Canadian Stocks Do Well During Inflationary Periods?
Depending on where we are in the economic cycle, some stocks perform better than others. The same holds true during inflationary periods. Going back to the 1970s, there have been five inflationary periods: 1970s, 1986 to 1990, 2002 to 2005, and 2006 to 2008.
Analysts found that during five inflationary periods, commodities have generated positive real returns. The real rate of return is the annual percentage of profit an investment returns when adjusted for inflation.
During those five periods, copper has averaged an 8.1% return, while gold has generated 21.3% in real returns. Light crude oil has average returns of 34.6%. In addition to energy and mining, banking, real estate, and consumer staple stocks can help offset the impacts of inflation.
History also shows that the S&P/TSX provides a better hedge against inflation than the S&P 500 does. Researchers found that during periods of inflation, the S&P 500 lost 5.9% in real returns versus the Canadian benchmark, which averaged annualized return of 2.3%.
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Canadian inflation is near a 20-year high. While the Bank of Canada has said soaring inflation is “transitionary” it hasn’t said how long that period will be. The fact is that the monthly increases in inflation are going faster and lasting longer than we were led to believe. This suggests Canadians will be facing ongoing inflationary periods for months to come. Fortunately, the trading experts at Learn-To-Trade.com can teach you how to successfully invest during periods of high inflation.
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