Managing inflation in Canada

Suraj K. Gupta is President & CEO of Rogue Insight Capitalan investment company focused on supporting diversity, innovation and social impact

Inflation around the world continues to be rampant and Canada has been hit particularly hard by rising prices. Until 2022, we have seen massive increases in consumer prices fueled by massive government spending, the war in Ukraine, supply chain factors and commodity price volatility. These factors, combined with Canadian real estate prices that have been rising for years, mean we are facing an affordability crisis not seen in decades. With increasing expectations that a recession is coming, and with rate hikes likely to continue for the foreseeable future, Canadian companies could face a difficult period. In this article, I’ll take a closer look at why Canada’s inflation problem can be worse than other countries in the world and discuss how to maneuver in this environment.

The Canadian riddle

Canada had one the worst inflation rates of the G20 countries until 2022. In fact, only two G20 countries experienced higher post-pandemic inflation than Canada in the summer (excluding Russia, Brazil, Argentina and Turkey, which have historic inflation problems that predate Covid). While Canadian inflation has eased slightly from its summer peak, Canadian grocery prices soared 11.4% in Sept.

While inflation is a global problem, Canadian inflation may not be declining as quickly as the rest of the world. World governments fight inflation through fiscal policy (federal banks reduce the money supply) and monetary policy (federal governments reduce net spending). Unfortunately, the Bank of Canada (BoC) uses a CPI measure that: undervalued inflation drastically. By the time the BoC started raising interest rates in March 2022, inflation had been above 3% for more than 8 months (well above Canada’s 2% target).

Furthermore, the Canadian federal government has continued to spend at a historic pace, and many economists have indicated that our current trajectory adds fuel to the fire. Jean-Francois Perrault, Scotiabank’s chief economist, has called on these issues and stated: that the Canadian federal government is not doing nearly enough to slow the rate of inflation. In fact, he along with several other Scotiabank economists estimation that a 2.3% cut in government consumption is equivalent to a 75 basis point cut in the BoC’s peak policy.

This means Canadian individuals and businesses will need to be positioned to weather the storm as inflation in Canada may not slow down at the same pace as other countries around the world. We will need to be well capitalized to make up for the inflation exacerbated by the BoC’s slow response and incredibly high government spending to get us to the other side.

How Canadian Companies Can Manage Inflation

We have seen in the past year that inflation in Canada was worse than in many other places around the world. This means that we cannot assume that Canada will follow suit if other countries start to see their inflation fall. When analyzing inflation trajectories, you need to consider all three inflation measures (CPI common, CPI median, and CPI trim) to get an idea of ​​where prices are heading and consider trends over several months.

Make sure you strike the right balance when signing long-term contracts. In some areas, you may be able to lock in prices before prices rise dramatically; however, you can also see suppliers pricing uncertainty in contracts to give themselves buffer space for the next 12 months. Double-check that you’re not committing an agreement that you might regret in 2023.

A cautious approach will be important if companies consider talent retention. Inflation can cause a wage spiral and you want to keep your key employees without having to hurt your bottom line too much with salary increases. It’s a tough environment to find human capital right now, so make sure you have open and candid conversations with your employees to manage expectations and stay ahead.

Finally, if your business is exposed to interest rate changes, complete a sensitivity analysis to understand how much increased interest you can tolerate. Even if the market only expects an additional 75 bp increase, you want to avoid a position where an additional 200 bp could put your business at risk. We have seen drastic negative market reactions as several national banks suggest that rate hikes could continue into next year. If your analysis shows that rates for your bottom line are approaching unsustainable levels, consider committing to a fixed rate today.

It goes without saying that we find ourselves in a difficult economic environment. Now that growth has turned recessive, the fundraising environment has become increasingly challenging. A strong level of liquidity will be critical for companies to get through this period, especially when this liquidity is yield-generating so that real value is not too much reduced by inflation.

Despite all the negatives we see in the global economies, there remains cause for optimism, as the right strategy can uniquely position companies for new opportunities. If you are able to retain the right talent, manage your costs and keep your war chest full for the next 12-18 months, you are likely to benefit from new projects and investments arising from competitors’ inability to capitalize on the above. to feed .

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