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Inflation Protect purchasing power with the right investment choices In 2011, Canadians were reminded once again how inflation IMPACT OF INFLATION ON THE COST OF GOODS OVER TIME can sneak up and strike with little warning when prices at the grocery store and gas pumps began to rise suddenly. Although, for now, prices appear to have stabilized and inflation remains close to the Bank of Canada’s target rate of 1%-to-3% per year, GASOLINE BREAD VALUE OF $1 1980 $0.291 $0.732 $0.36 2011 $1.191 $2.782 $1.00 % change 310% 281% 179%3 even small numbers, when compounded over many years, can (per litre) seriously erode future purchasing power. For this reason, it makes sense for prudent investors to protect against the threat of inflationary price increases when it comes to the investments they select. Measuring inflation and its effects Inflation is defined as the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. In Canada, the most common measure of price inflation is the annualized percentage change in the Consumer Price Index (CPI). So-called real investment returns take into account the effects of inflation. For example, if an investor receives a return of 6% over the course of the year but the inflation rate is 2%, the real return is reduced to 4%. Over time, this amounts to a significant amount of money — and even more if the inflation rate climbs to 3% or 4%. 1 2 Price of a litre of gasoline from December 1980 – December 2011. Source: Statistics Canada. 2Average price of 675g of bread in December, 2008 multiplied by the price index, bread and rolls from December 1980 December 2011. Source: Statistics Canada. 3Source: Bank of Canada, Inflation Calculator 1 INFLATION CAN SEVERELY REDUCE PURCHASING POWER At an inflation rate of only 2%, $100,000 would buy only $55,207 worth of goods and services in 30 years. $100,000 $80,000 $60,000 Inflation Rate 2% $40,000 3% 4% $20,000 Today $55,207 $41,199 $30,832 10 years 15 years 20 years 25 years 30 years Figures were calculated based on hypothetical 2%, 3%, and 4% rates of inflation to show the effect of inflation over time; actual inflation rates may be more or less. Source: CIBC Asset Management. Inflation Inflation or deflation? Over time, the inflation rate has varied greatly, ranging from deflationary (negative inflation) periods in the 1930s to double-digit inflation during the 1970s and early 1980s. In fact, inflation peaked at 12% on more than one occasion during the early ‘80s and mortgage rates spiked to more than 22% in 1981.1 Protect purchasing power with the right investment choices Asset classes that can help protect from inflation include: Inflation-linked assets: Real return bonds and inflation-linked securities provide some inflation protection via an explicit link to Predicting future inflationary environments is a recurring debate among economists. CPI, preserving purchasing power. Over the last 30 years we have experienced multiple changes in the inflationary Real assets: Companies included in this environment, ranging from inflationary boom to deflationary bust. Regardless of the current economic environment, investors should always be prepared for the effect inflation may have on their investments. asset class – including real estate and infrastructure – can typically pass along their increased costs resulting in partial There are a number of investment asset classes with inflation-hedging characteristics inflation protection. that can help investors maintain purchasing power while at the same time providing Commodity-related assets: A high- global growth opportunities. and-rising inflation rate is often driven by robust economic growth, which typically Investing for inflation When it comes to protecting against inflation, and especially unexpected surges, not all types of assets are created equal. Although, for example, equities usually leads to higher demand for commodities, driving their prices up and offering some protection to investors. outperform inflation in moderate inflationary scenarios, stocks tend to suffer Emerging market assets: Emerging from inflation surprises, such as a sharp increase in the inflation rate over a short markets are usually among the fastest- period of time, for example. It takes the right combination of asset classes to growing economies in the world during successfully hedge against inflation while also pursuing global growth opportunities. a global economic expansion, affording Including inflation-hedging investments in a portfolio can help maintain purchasing power for the future. Advisor Contact Details investors a measure of inflation protection. All-in-one approach: In addition to individual inflation-hedging assets, some specialty portfolios – such as the Renaissance Optimal Inflation Opportunities Portfolio – offer a tactically managed combination of inflation-hedging assets and global opportunity-seeking investments in one portfolio solution. www.renaissanceinvestments.ca Source: Bank of Canada Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. This material was prepared for informational purposes only and is not intended to convey investment, legal or tax advice or to solicit sales. Please read the Renaissance Investments family of funds Simplified Prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The information contained in this document has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. The material and/or its contents may not be reproduced without the express written consent CIBC Asset Management. ™Renaissance Investments and “invest well. live better” are registered trademarks of CIBC Asset Management Inc. 1 02508E(201204)