The most recent inflation numbers are in and it’s not pretty. US inflation posted the sharpest spike since 1982, jumping to 7.9% while Canada's inflation rate accelerated at a quicker pace than expected and reached a 30-year high of 5.7%.

If you feel like everything is getting more expensive, you’re not imagining things. Over the past 12 months, consumer’s pockets have been a little lighter as their dollar isn’t going as far as what it once did due to significant increases in core goods & services:

  • Gasoline has surged +32.3%
  • Grocery store prices have seen their largest yearly increase since May 2009 as they’ve been pushed higher by rising fuel costs
  • Fueled by the raging housing market, housing costs (which includes prices for homes and rental units), rose at their fastest pace since August 1983

Unfortunately, relief doesn’t look like it’s coming any time soon. Prices for some of the key drivers of inflation in February are likely to edge higher in March given the uncertainty around Russia's unprovoked invasion of Ukraine.

In an effort to tame the highest inflation figures in decades, both the Bank of Canada and the US Federal Reserve began the “inflation fight” by raising their key rates for the first time in three years by a quarter-point.  This has been the worst kept secret as rate increases have been forecasted for months however the timing and pace has accelerated.  Multiple forecasts have policymakers on track to increase rates as many as five to seven times by the end of 2022.

What could this mean for the markets over the next 12 months?

History suggests markets are poised to experience volatility in the near term following the first-rate increase, however that doesn’t always mean the future is bleak.  As illustrated in the chart below, the Fed has taken on five distinct rate hike cycles over the past three decades and none have been detrimental to equity markets over the mid to long term. Looking back at the previous eight “cycles” of increasing rates, the S&P 500 was higher 12 months after the first increase in every situation.

For investors, it’s important they understand the importance of how inflation and taxes affect their ability to maintain their lifestyle and long-term goals.  On one hand, cash “in the bank” provides comfort during uncertain times however as the cost of goods and services increase, their ability to buy a loaf of bread or fill their tank gets more expensive.  They have no choice but to “get their money working” to keep up with tax and inflation.

Having a disciplined investment strategy, which includes a diversified approach of good quality companies, coupled with defensive alternative securities outside of traditional fixed income, will put investors in a position to maintain their lifestyle objectives and have positive experiences.

Harbourfront Wealth Management was one of Wealth Professional Magazines 5 Star Brokerages for 2022. Wealth Professional is a free online information resource for all Canadian advice and planning professionals. This is not a paid award Harbourfront Wealth Management is not a sponsor.

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