An often used but little understood term in financial circles,
inflation has been misinterpreted as a result or an effect of higher
prices, but this is not the case.
Inflation
Inflation is a
condition in a particular country's economy where the amount of
available currency outstretches the GDP figure for that country. This
that is known as inflation, and higher prices are a result of this
situation.
This affects the Canadian investor by causing consumer
pricing to rise, thus leaving the investor with less money to invest
with after buying groceries and filling their gas tank. This inability
to invest also affects the stock market, leaving companies with less
avenues of capital acquisition. For example, if the CPI levels rise
considerably, markets such as the TSX can experience a lull in trading
causing its index to drop. This could indicate that an economy is either
stagnant or heading towards recession. Of course, this isn't in the
best interest of any country and if left unchecked, would lead to a
wildly fluctuating market with tremendous risk such as the markets just
before Black Tuesday, October 29, 1929. We have learned our lessons
since and safeguards have been put in place to ensure that the market
won't bottom out like that again.
The Bank of Canada has a hand in
setting inflation rates to accommodate the disparity of goods versus
monetary availability. By monitoring the core CPI, the Bank of Canada
arrives at the comfortable inflation numbers that will keep the economy
on track and within good financial reason. If you are wondering, core
CPI is a specific group of consumer goods not considered to be volatile.
The term 'volatile' in this context is meant to refer to price
fluctuation, not combustion. These volatile products would include such
things as fuel, vegetables, fruit, tobacco products and mortgage
interest.
In the 1980s, according to Statscan, the inflation rate
was at 10%. This may seem minuscule, but a rate such as this can cause
general consumer pricing to double in less than ten years. Luckily for
Canadians, our inflation rate has dropped to less than 5%. With current
mandates from the Bank of Canada to put the inflation rate at 3%,
consumer pricing would take approximately 24 years to double. This
presents a much more tantalizing prospect for the Canadian investor with
long-term goals.
According to investing experts, inflation is not
a bad thing. The Canadian investor has to be aware of certain factors
in their investment, suppose McCain Foods has an offering of 100,000
shares with a rate of 4%. If the Canadian economy had an inflation rate
of 3%, this would leave the prospective investor with a positive growth
percentage of 1%. Not a bad investment. However, if the Canadian economy
had an inflation rate of 5%, the prospective investor has started their
investment in the red, not necessarily a good investment idea. But even
in this situation, investment isn't really out of the question. If you
can ascertain that the economy is headed for a sustained surge down the
road and you are thinking about long-term investment, it might be
prudent to buy-in as your investment in the long run may achieve a
positive growth outstripping the rate of inflation. This is dependent on
when the economy will perform, for how long and how well versus the
time length of your investment. Knowing about inflation is an important
step to losing needless and ill-informed investment fear.