April 21, 2021
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Of course, having provided you with US numbers last week, I’d be remiss not to include the Canadian inflation numbers, which were released this week. Perhaps somewhat surprising is that the year-over-year inflation number rang in at 2.2%, which came in a smidge lower than expected by analysts. In other words, what cost you $100 one year ago costs you $102.20 today.
What’s not surprising is the continued downplaying by major Bay Street economists and players. Yet again, we’re reminded that the spike up in inflation is merely due to baseline effect, i.e. the fact that inflation was so low one year ago. But, as I’ve mentioned before, these experts are ignoring the other factors, such as money printing, which will also have an effect on inflationary numbers for years to come.
On a side note of interest, I read a comment this week in an email I regularly read that posited this suggestion: if this is only a base effect that’s pumping up the inflation rate, why are the fiscal authorities then even using 2020 as the base year? Why not instead compare this year’s inflation to March 2019, rather than 2020? I find this an interesting thought to consider.
Why am I harping on inflation so much during an investment-centric commentary? Because inflation plays a big role in assessing your real returns on your investment. If you’re investing only in GICs, which pay less than 1% annually right now, you’re automatically behind in terms of growing your wealth, and that’s not even taking into account tax implications. So, as with my earlier example, if one year ago you invested $100,000 in a GIC paying 1%, your account is now worth $101,000, which is less than the $102,200 needed to buy today what you could have purchased one year ago at $100,000.
Expanding this longer term, if you’re sold into thinking that inflation can’t and won’t be higher than 2% annually and, as such, invest that way, you could be in for a surprise if and when inflation takes off. So, while GIC investing may seem “safe”, you need to reconsider that notion and what it means for your long-term financial well-being. Otherwise, while your wealth may appear to grow on paper without risk, in reality you’re falling more and more behind thanks to the inflationary juggernaut so many others are telling you to ignore.