I present to you the Canadian Consumer Price Index.

The Bank of Canada defines the CPI in the following manner: The Consumer Price Index (CPI) represents changes in prices as experienced by Canadian consumers. It measures price change by comparing, through time, the cost of a fixed basket of goods and services.

What is this 25 year graph telling us? For the past 25 years, the CPI (inflation rate) trended in a narrow band, with a median of 2% (The green line). Total CPI / Inflation (Blue line) has swung more broadly, surpassing 4% briefly only once in the past 25 years, and moving negative very briefly only twice. On the whole, Governments have succeeded in keeping inflation within their target range of approximately 2%. As a consumer, I know this is not a realistic picture of how inflation has affected my life – Housing, transport, food, education have all grown at rates far higher than 2%. But let’s ignore that for a minute.

For the first time in most of our investing lifetimes, inflation has shot well above its target range of 2% and was sitting at 5.7% as of the end of February, and is likely higher currently.

Essentially, prices on everything are shooting up due to 1) the money supply being increased by central banks around the world to prevent a Covid induced depression, 2) Supply chain disruptions which have thrown the supply / demand balance out of whack for everything from food to pharmaceuticals to building materials and 3) the ongoing simmering effect of ultra low interest rates which has pushed up the prices of hard assets continually for more than a decade.

So, the big question is ‘what’s next?’. This past week, the bank of Canada raised its interest rates by .50 basis points to 1%. The overall rate still is ridiculously low, but the change represents a 100% increase and the biggest single increase in over 22 years. And there is undoubtedly more to come as Canada and other nations around the world start to get serious about trying to forestall inflation before it gets completely out of hand.

If you or your business have borrowed money, things are getting more expensive. If you’ve financed the purchase of assets with that borrowed money, there is an increased likelihood that the value will go down, as they become more expensive to own (less affordable). This is especially true in sectors where this is common (eg. commercial and residential real estate).

Unlike previous inflationary spikes over the past 25 years, this one has arrived at the literal bottom of the interest rate cycle. It is possible that rates can go lower, or even negative at some point. But have a look at this chart.

The Blue line is the Bank of Canada’s overnight lending rate – The rate that just doubled to 1%. The orange line is the Bank Prime Lending rate, which is more akin to the cheapest level of borrowing costs available.

I’m a firm believer in keeping things simple. What do you think is going to happen here? As importantly, what must happen here if central banks are serious (they are!) about dealing with the highest inflationary pressures in the last 40 years? That chart looks like a big big decade long consolidating bottom.

We’ve all been living on a one way street for most of our adult lives. Declining rates and demographics have been powerful winds at our back. But now the winds of change are blowing.

“When the winds of change blow, some people build walls, and others build windmills”. ~ Chinese proverb

GLTA!