Download Inflation Protect purchasing power with the right investment choices

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
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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.
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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
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