- According to Statistics Canada, inflation dropped to 4.3 per cent YoY in March, the lowest since August 2021
- While the Bank of Canada sees inflation reaching its 2 per cent target by the end of 2024, prices are still increasing, though at a decelerating pace
- This reality carries investment implications regarding cash flow, undervaluation, brand power and upside surprises, all of which are discussed below
According to Statistics Canada, inflation dropped to 4.3 per cent YoY in March, the lowest since August 2021.
The reading is down from 5.2 per cent in February thanks to a 13.8 per cent YoY decline in gas prices, the largest since July 2020, offset by higher mortgage interest costs, which rose at a record pace last month of 26.4 per cent YoY.
Grocery prices also rose 9.7 per cent YoY in March, down from 10.6 per cent in February, thanks to lower prices for fruits and vegetables, offering little relief to consumers procuring day-to-day necessities.
The Bank of Canada (BoC) sees inflation reaching 3 per cent by mid-year, spurred on by its preferred measures of core inflation also trending downward in March. That said, the central bank has been clear about the potential of its key interest rate remaining higher for longer to reach its 2 per cent inflation target by the end of 2024.
The main drivers of persistently high inflation have been service price growth, up 5.1 per cent YoY in March, and wage growth, up 5.3 per cent YoY in March and growing at a faster pace than inflation.
The BoC’s key interest rate stands at 4.5 per cent, the highest since 2007.
The main takeaway from Statistics Canada’s inflation report is that price increases are still broadly prevalent, but at a decelerating pace, meaning the ride to historically average costs for companies and consumers alike has yet to peak before the fall. This state of affairs carries investment implications that may be actionable contingent on your risk tolerance, investing knowledge and financial goals:
Cash flow: Given elevated input expenses, especially in capital-intensive sectors like mining and biotech, companies that are generating sufficient internal cash flow to fund operations occupy a prospective playing ground. The Market Herald’s Cash-Rich Report may offer some food for thought.
Undervaluation: On the flip-side, companies with worthwhile products and solutions, whose balance sheets do not yet reflect financial health, represent potential undervalued opportunities for the right due diligence process that is able to accurately track future growth. Certain names covered in The Market Herald’s Anatomy of a Flagship Asset may be of interest here.
Brand power: Businesses that control well-known brands are at a particular advantage in the present moment, because they’re the most likely to pass on price increases to customers without sacrificing revenue. A key vector here would be to identify out-of-favour members of this group, whether due to recent performance or some other idiosyncratic event, whose long-term prospects are otherwise unharmed.
Upside surprises: It’s important to recognize that BoC forecasts are not set in stone, meaning that the bank’s interest rate hikes, while envisioned to continue slowing the economy into next year, may prove excessive in retrospect should inflation drop below 3 per cent by mid-year from its high of 8.1 per cent in June 2022. Such a situation would nudge investors with sidelined capital to re-enter the market, generating positive momentum at the prospect of price normalization, despite higher borrowing costs over the short term.
Investors can look out for Statistics Canada’s next Consumer Price Index report, slated for May 16, followed by the BoC’s policy interest rate decision, slated for June 7, for the next set of indicators as to how to best position themselves with respect to the theses discussed herein.
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