Inflation Rises to Over 3%: 3 Reasons to Be Cautious

Consider investing in Constellation Software as one of the steps to beat the rising inflation rates in Canada.

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Caution, careful

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Consumer prices in Canada have risen at the fastest rate in a decade, as inflation accelerated to 3.4% in April compared to 2.2% in the previous month. Analyst predictions for the rising inflation rates of 3.2% were beaten to make an already worrying situation more problematic.

The annual reading is the highest it has been since May 2011, raising concerns that price pressures could be far greater than Bank of Canada’s predictions. If inflation proves to be more resilient, the central bank may find itself forced to increase interest rates a lot earlier than it planned.

You might not have control over inflation rates as a consumer, but you can take steps to protect your capital from its effects.

1. Reduce driving time

Gas prices were up 62.5% in April compared to the same period last year. The rising gas prices were the most significant contributor to annual inflation. If gas prices remained the same, the inflation rate would have been only 1.9% instead of 3.4%. Unfortunately, analysts do not expect gas prices to come down anytime soon.

Increasing vaccinations will make travel more likely. Combined with carbon taxes coming into effect and falling oil production, gas prices may even increase. An ideal way to protect your financial situation would be to reduce driving or stop driving unless it is completely necessary.

2. Reduce spending

Take a good look at your budget to see which expenses are being affected by inflation rates. Rising gas prices are just one aspect of your budget affected by inflation. It might be time to broaden your perspective and reduce spending in other areas.

Timber prices have increased four-fold in the last 12 months, along with other major consumer products. It might be better to delay any building projects you planned this summer until prices come down. You might want to delay purchases like furniture and vehicles and even let go of subscriptions you do not need until things improve.

3. Continue investing in the stock market

Remaining invested in the stock market for the long run is the best way to defend your capital from the effects of inflation rates. Rising inflation adversely affects stock market returns. However, the rate of return on stocks tends to beat inflation rates. You could set yourself up with a strong hedge against rising prices provided you have invested in the right companies.

Constellation Software (TSX:CSU) could be an excellent stock to consider for this purpose. The company is a reliable compounding machine that has garnered a reputation for acquiring small- and medium-sized software companies. Constellation Software has acquired over 500 businesses throughout its existence, and the company’s management plans to move into acquiring larger businesses.

The stock has provided almost 8,500% in returns since October 2007, translating to an impressive average annual return greater than 38%. The TSX has provided just 2.41% average annual returns in the same period. Remaining invested in such a company could provide you significant returns to beat rising inflation and grow your wealth over time.

Foolish takeaway

Reducing your expenses can help you preserve capital for essential needs. Fortifying your investment portfolio can help you set yourself up for inflation-beating returns. Investing in Constellation Software could be useful for this purpose.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Software.

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