We are in one of the most aggressive tightening cycles in more than 40 years. Are higher rates helping to curb inflation? At the time of writing, there have been positive disinflationary signals as commodities prices, notably energy, have moderated and certain pricing pressures appear to be easing.
While higher inflation rates continue to put a strain on many, consider that we aren’t alone. Most of the world has been troubled by inflation; countries like Turkey and Argentina have had unprecedented rates, in excess of 70 percent! Only a handful of nations, such as South Sudan and Bolivia, have been able to escape inflation. Canada continues to be in a comparatively favourable position due to our vast domestic resources production and as a net exporter of both food and energy. Many European countries suffer from high energy and food prices due to their dependence on imports and there are concerns about a worsening energy crisis over the winter months.
For investors, talk of slowing inflation is welcome because this may slow the pace of future rate hikes. Rising interest rates have been a key driver of the volatile markets in 2022. For fixed income, the inverse relationship between bond prices and interest rates meant a significant decline in the bond markets this year. For equities, valuations often go down as the future value of cashflows is lower when a higher discount rate is used. Company profitability may also be hampered by slower economic growth.
Inflationary pressures are expected to continue, so it’s too soon to say if the central banks will ease their approach. Yet, our monetary policy practices appear relatively benign when compared to others: In August, Argentina raised its key interest rate to a whopping 69.5 percent!
G20 Countries with Highest Inflation, As of August 2022