Tag: inflation

Inflation Rises in Canada

Posted by WFG – June 29, 2011

The annual inflation rate in Canada rose a massive 3.7% last month due to an increase in gasoline prices. It now sits at the highest level in 8 years and has pushed the index limit far above expectations.

Analysts had expected the rate to fall 0.2% in April, but the month on month price rise more than doubled 0.7 from the origin al 0.3. These results cause problems for the Bank of Canada governors, with less than three weeks prior to a meeting, arranged to discuss short-term interest rates. The bank had predicted a rise above 3%, but no one contemplated that it would be above this limit for three consecutive months.

One of the main culprits was the rise was gasoline. From April it rose 2.0%, which made it 29.5% higher than May 2010. If you exclude the gasoline jump, annual inflation rates would be at a more casual 2.4%, and despite it still being above the likeable bank rate, it would be far more manageable. Other volatile items, such as selected foods and energy, only rose to 1.8% and continue to sit below the 2% target. In addition to this, it’s suggested that gasoline prices have fallen in June.

The Bank of Canada has set their target of between 1-3% in the short term, before decreasing to 2% by mid-2012. The only question is how they plan to keep the inflation manageable.

Canadian Monetary Policy Unchanged, Loonie and Productivity

Posted by winflowfinancial – June 9, 2011

The central bank of Canada on May 31 announced no change to the benchmark interest rate, marked the continuation of the relatively loose monetary policy. At the same time, the Canadian dollar remains at $1.02 USD level, after dropped from over 1.05. Many investors are expecting the Canadian dollar to remain at or above par with the US dollar for a considerable amount of time, because the Fed is expressing no intention of tightening monetary policy, while Mark Carney did say in the news release that

“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target.”

which many finds as indication of tightening the policy.

There was also a note specifically on the exchange rate,

“ the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”

The fact that a stronger Canadian dollar may have deteriorating effects on the productivity of Canadian companies was reported earlier in April. On April 15′s Financial Post, several articles pointed out that the stronger loonie reduces productivity, attracts less foreign capital, and increase the real supplier price of imported goods. Some excerps

On productivity:

“Higher commodity prices boost the loonie, and that in turn can squeeze manufacturing, boost incomes and employment in services and the public sector (as the government becomes flush with tax dollars), and by encouraging development of less economically viable resource bodies.”

On Foreign Direct Investments:

“The more productive an economy, or the more goods a worker can produce in an hour, the higher that country’s standard of living, economists say. Canada, however, has long underperformed in that regard, particularly in relation to its largest trading partner, the United States.

The issue is now further complicated by a Canadian dollar that has climbed above parity with the U.S. greenback, and which will hurt exports for years, Bank of Canada governor Mark Carney warned on Wednesday.”

On supplier prices:

“The reality is that the underlying prices that Canadians pay and Americans pay really don’t change that much over time, but the currency has these huge swings that can make this sort of comparison shopping between Canada and the U.S. go all over the place,”

Recession News: Stronger Growth in Second-Half of Year

Posted by Winflow – June 7, 2011

Today, Federal Reserve Chairman, Ben Bernanke, announced that despite a slowdown to the economy, he has hopes for strong growth in the second-half of the year. Likely influencing the American economy, economic growth overseas has slowed due to the debt crisis in Europe and the natural disasters in Japan. Bernanke advised the following to keep the economy on track:

  • Insititute a long-term plan for fiscal growth.
  • Keep the federal government’s monetary support in place.
  • No large short-term budget reductions by politicians. Doing so could cause fiscal contractions which would put the economy at risk.

Bernanke also mentioned the following:

  • The spike in inflation is nothing to be concerned about as it won’t last long due to weak wage growth.
  • U.S. growth has been slow as seen by the data released showing employers in the U.S. only hired 54 000 new employees last month.
  • Labour growth has lost momentum in recent months.

Despite the declining momentum of the economy Bernanke made no mention of further monetary stimulus by the central bank. For the complete details read this article.

If you’re worried the recession will continue to have a negative impact on your business and need help to make adjustments to your business plan, contact the Winflow Financial Group. Our consultants will determine the best plan of action for the remainder of the recession.

Inflation subdued, expectation anchored, said FOMC minutes

Posted by winflowfinancial – May 25, 2011

THE FED TRIES TO TEMPER MARKET INFLATION

The FOMC minutes of the meeting of April 26-27 reinforce the general ideas that  Chairman Bernanke spoke about at the press conference after the meeting.

Regarding the increased headline inflation, the FOMC addressed the existence, but “generally anticipated that the higher level of overall inflation would be transitory.” As recorded in the minutes,

A few of these participants thought that economic conditions might warrant action to raise the federal funds rate target or to sell assets in the SOMA portfolio later this year, but noted that even with such steps, monetary policy would remain accommodating for some time to come. Other participants indicated that underlying inflation remained subdued; that longer-term inflation expectations were likely to remain anchored, partly because modest changes in labor costs would constrain inflation trends; and that given the downside risks to economic growth, an early exit could unnecessarily damp the ongoing economic recovery.

WHAT IS INTERESTING IS HOW THE FED IS VIEWING INFLATION. They acknowledge that prices are going up, but are putting the emphasis on inflation expectations.  They mention monetary tightening but are still expanding the monetary base EVEN with increasing inflation pressures.  Quoted from the minutes:

While some measures of longer-term inflation expectations had risen, others were little changed or down, on net, since
March, and members agreed that longer-term inflation expectations had remained stable.

The officials recognized price increases in consumer products too. Quoted:

Many participants reported that an increasing number of business contacts expressed concerns about rising cost pressures and were intending, or already attempting, to pass on at least a portion of these higher costs to their customers in order to protect profit margins.

THIS REINFORCES THE DOVISH EXPECTATIONS OF THE FINANCIAL AND BUSINESS MARKETS and we should not expect the FED to tighten monetary policy in the near future.

THE FUTURE PROJECTIONS OF INFLATION BY THE FED

The minutes turned to talk about core inflation in the medium term, and said that’s subdued. However, in the projection chart given, the Fed predicted a possible over 3% headline inflation in the year of 2011.

 

IN CONCLUSION

The Fed will have to deal with inflation sooner or latter and the prudent approach of the intelligent investor would be to construct their investments accordingly. Giving that monetary policy is tightening, the long asset approach to investing is not to be relied upon and a more active investment style is required.

 

 

Question: Are TIPS holders really protected?

Posted by winflowfinancial – May 12, 2011

It is not rare to see misconceptions about financial jargons. For example, a “hedge fund” does not mean the risks are “hedged”, and the income from “fix income” securities is often not “fixed”. How about Treasury Inflation Protected Securities (TIPS)?

Quoted from Investopedia.com:

“A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation.”

That does seem to be a valid definition at the first glance. However, there is much ambiguity about the term “inflation” here.

Quoted again from Investopedia.com:

“The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.”

Therefore, when people purchase TIPS, they subconsciously think that they are protected against inflation, and, subsequently, falling of purchasing power, as defined above. However, chances are that they have ignored the difference in the definitions of inflation.

TIPS provide protection against inflation by adjusting the principle by increases and decreases  as measured by the Consumer Price Index (CPI). When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. So what does the CPI measure?

THE CPI

The CPI is calculated by the  the Bureau of Labor Statistics. It tries to measure changes in price in the us economy based on average spending habits. This figure is an estimate so average spending habits might not reflect individual spending habits. Also it does not focused on asset apreciation ( home price makes up a small contribution to the index), business costs, and currency devaluation.

There is further contraversy that the CPI may not refect the real loss of purchasing power because, there have been arbitrary adjustments to the inputs over the years. It is not a pure observation but assumes change in behaviour and improvements in productivity. 

THE CONCLUSION

Depending on how you define inflation, TIPS might not provide adequate protection.  

More on the Fed and how it views inflation was discussed here.

Inflation at the street corner

Posted by winflowfinancial – May 7, 2011

A coincidence? Just as we have been writing about large consumer product companies such as Nike,  Kimberly-Clark and P&G implementing price increases, we found this notice in the owner operated cafe next to our office building. Transitory or permanent, the inflation has started to hit our lunch boxes.

Why We Should Diversify our Portfolios’ Base Currency

Posted by winflowfinancial – April 28, 2011

Since the beginning of 2011, the US dollar index has depreciated by about 5%. The S&P500 has increased by about 5%.the net effect being that the US dollar purchasing power outside of its borders has been maintained.

Everyday there are numerous media reports of higher commodity prices and emerging market inflation. European, Asian, and South American central banks are being vocal as to their concerns and criticizing the US Federal Reserve for its loose monetary policy.  Ben Bernanke, chairman of the Federal Reserve defends his expansionary policies by claiming that the United States inflation environment and expectations are well anchored. What is the investor to believe?

In a WSJ article “Bernanke’s Inflation Paradox’, it states that the Fed’s easy monetary policy:

  • “rarely has been so obvious  as it is today”
  • is causing inflation in countries with links to the dollar?
  • is prompting investors to seek returns in non-dollar assets and that might be a misallocation of capital

Easy monetary policy has become the general understanding and expectation today. Ben Bernanke is saying there is no problem regarding the current inflation environment and describing it as transitory.

When Fed officials are talking about inflation, we have to understand what indicators they are looking to for guidance. The Fed focuses on core inflation (PCE) which excludes gasoline and food. They do not focus on asset prices and defend their position that asset bubbles are not caused by loose monetary policies. They also do not react to the immediate numbers but instead try to forecast how the numbers affect the expectations for future product price increases and eventually employee wages. One should also note that the PCE and alternately the CPI calculation have many arbitrary adjustments to smooth and reduce the final number for a more palatable result.

Bernanke acknowledges pressure on commodity prices; he puts the blame on emerging economies. He says that the slack in both employment and production in the US will suppress prices, because corporations are going to absorb the higher commodity prices by reducing their profit. However, consumer product companies have announced plans to raise prices over 5%. International companies are benefitting from repatriation of profits because of the weaker dollar; they are raising prices indicating their costs are going up, especially in the food industry.  Note: consumer goods companies stocks have rallied on the price increase announcements indicating that the market believes that the price increases will flow to profits and not be entirely absorbed by inflation.

The current consensus is that Bernanke is pro-business. Speculators and investors all over the world are jumping on this as we are seeing major moves against the US dollar. Ben Bernanke is like a father who likes to spoil his child. Loose monetary policy is a treat and should be used sparingly. The business community got so used to easy monetary policies over the last twenty five years that any withdrawal of the policy will be met with major resistance and difficult repercussions. However, as a parent this will not be sustainable, as for Bernanke it will probably get him through his current term but will not be sustainable down the road. (How Bernanke is different from Greenspan)

Conclusion

We expect the US dollar to continue its current downward momentum until there is a change in the government and/or Federal Reserve policies. We might have to wait until at least the next presidential election for this change of direction. The solution is to create a basket of currencies, with a 25% to 75% correlation to the US dollar, depending on one’s individual established criteria .