Canada’s inflation rate hit its highest level in years. At 3.4%, it was the biggest increase in prices since 2011. The figure mirrored a similar trend in the U.S., where commodities like gasoline, lumber and steel rose dramatically in the first half of the year. In this article, I’ll explore Canada’s abrupt inflation spike and whether consumers can expect it to continue.
Where’s the inflation coming from?
The high level of inflation reported in April was driven by commodities like:
- Oil & gas
Other products and services were less affected, including:
- Clothing, up just 1.8%
- Cellular services, down 10%
For the most part, it looks like a few products are driving most of the inflation we’re seeing. Gasoline and lumber have risen markedly in price, and other products less so. There have even been a few items that have declined in price. Gasoline–one of the items that has risen the most–has historically been volatile, going up and down over time. So it’s hard to say whether the increase in inflation is a trend or just a temporary blip on the screen. Only time will tell.
Is this unusual?
While 3.4% inflation might appear unusual, it’s actually not. The thing is that inflation got close to zero (sub-1%) last year, when the pandemic forced businesses to shut down. Faced with a shutdown, many people were put out of work, which reduced demand. At one point, oil prices (as measured by West Texas Intermediate) went negative, but later shot up at a record pace.
This kind of thing is pretty common in the aftermath of recessions. During recessions, people tend to cut back on spending, and may save whatever aid they get from the government. Disinflation, or even deflation, can occur, creating pent-up demand that comes roaring back when the economy comes back to life. The last time it happened (prior to this year) was after the great recession of 2008/2009. It happened after the Great Depression as well.
A stock that profits from inflation
While inflation is bad for consumers, it’s great for investors, or at least, for investors in stocks that profit from inflation such as Suncor Energy (TSX:SU)(NYSE:SU). Suncor is a company that drills for oil and sells it in the form of gasoline. As a fully integrated energy company, it should make more money the higher the price of gasoline goes.
So far this year, it has indeed been making more money than last year. In the first quarter, Suncor Energy earned $821 million, compared to a $3.5 billion loss in the same quarter a year before. The higher the price of gasoline goes, the higher SU stock climbs. Suncor could therefore be a decent way to hedge against inflation.
Inflation is always a scary thing to think about. But it needn’t be scary in reality. Higher prices are a sign that demand is picking up. In light of this, you could look at inflation with optimism, as a healthy sign that the economy is coming back to life. And of course, you can always look at stocks like Suncor Energy as tools to hedge against its worst effects.