Inflation and your investments


Inflation and your investments

Two years ago, in April of 2021, inflation began its current rise. Everyone is well aware of how higher inflation is impacting our cost of living, but how does it affect our investments?

Investment approaches

Higher inflation affects fixed-income investments more than it does equities. Many companies can protect their profit margin by passing on rising costs to customers. But bond investments are negatively impacted. Inflation triggers interest rate increases, which reduces bond values – especially for longer-term bonds. Fixed-income managers may shift toward shorter-term bonds to help manage the risk. Some conservative investors who rely heavily on bonds might adjust their investment strategy or save more, depending on their financial objective and how long higher inflation lasts.

In equity investing, there are generally two different approaches to deal with higher inflation. The active approach is to increase investments in sectors that historically perform better than others during rising inflation, including financial services, energy, commodities, consumer staples, utilities and real estate. The passive approach is to maintain a well-diversified portfolio. This avoids any risks involved in timing market conditions, while still gaining exposure to sectors that perform well when inflation is higher.

Meeting your retirement savings goal

In projecting how much you need to retire, we account for the effect of inflation. Until the recent spike, such projections commonly used an inflation rate of approximately 2%. Whether a higher rate should be used depends on how long today’s increased rates last. The Bank of Canada is optimistic, forecasting a decline in the inflation rate to 3% by year-end and a return to its 2% target by the end of 2024. In a year or two, we should have a clearer picture of how inflation could impact retirement savings and whether a larger inflation cushion may be needed.

Please contact us if you want to discuss how your investment portfolio and wealth plan account for inflation and remain positioned to meet your long-term financial goals.

1 Bank of Canada, Monetary Policy Report, October 2022.


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