Forbes: Managing Inflation In Canada

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

Inflation around the world continues to run rampant, and Canada has been hit particularly hard by rising prices. Through 2022, we have faced massive increases in consumer prices fueled by gargantuan government spending, the war in Ukraine, supply chain factors and commodity price volatility. These factors, paired with Canadian real estate prices that have been spiking upward for years, mean that we are facing an affordability crisis that we have not seen in decades. With increasing expectations that a recession is on the horizon, and with rate hikes likely continuing into the foreseeable future, Canadian businesses may be in for a rough patch. In this article, I am going to dive deeper into why Canada’s inflationary problem may be worse than other countries in the world and discuss how to maneuver in this environment.

The Canadian Conundrum

Canada has had one of the worst inflation rates out of G20 nations through 2022. In fact, over the summer, just two G20 nations faced higher post-pandemic inflation than Canada (excluding Russia, Brazil, Argentina and Turkey, which have legacy inflationary problems that pre-date Covid). Although Canadian inflation has come down slightly from summer highs, Canadian grocery prices were up a staggering 11.4% in September.

Although inflation is a global problem, Canadian inflation may not abate as quickly as the rest of the world. World governments combat inflation via fiscal policy (federal governments decreasing net spending) and monetary policy (federal banks decreasing the money supply). Unfortunately, the Bank of Canada (BoC) uses a CPI measure that has understated inflation drastically. In fact, by the time the BoC began hiking interest rates in March 2022, inflation had been above 3% for over 8 months (well over the 2% target rate for Canada).

Further, Canada’s federal government has continued to spend at a historic pace, and many economists have indicated that our current trajectory is adding fuel to the fire. Scotiabank Chief Economist Jean-Francois Perrault has been ringing the bell on these issues and has stated that the Canadian federal government is not doing nearly enough to slow the pace of inflation. In fact, he along with several other Scotiabank economists estimate that a 2.3% reduction in government consumption is equivalent to a 75bp reduction in the BoC’s peak policy rate.

What this means is Canadian individuals and businesses will need to be positioned to weather the storm, as inflation in Canada may not slow at the same pace as other countries around the world. We will need to be well-capitalized to make up for inflation that has been exacerbated by the slow reaction from the BoC and incredibly high government spending to take us through to the other side.

How Canadian Businesses Can Manage Inflation

We have seen this past year that inflation in Canada has been worse than many other places globally. This means that we cannot assume Canada will follow suit if other nations begin to see their inflation rates come down. As you analyze inflationary trajectories, be sure to consider all three measures of inflation (CPI-common, CPI median and CPI-trim) to get a sense of where prices are going and to consider trends over several months.

Ensure you find the correct balance when signing long-term contracts. In some areas, you may be able to lock in pricing before prices rise drastically; however, you may also see suppliers pricing uncertainty into contracts to give themselves buffer room for the next 12 months. Double-check that you are not locking in an agreement you might regret in 2023.

A cautious approach will be important as businesses consider talent retention. Inflation can cause a wage spiral, and you will want to retain your key employees without having to erode your bottom line too heavily from salary increases. It is a tough environment to find human capital at the moment, so ensure you are having open and frank conversations with your employees to manage expectations and stay ahead of the curve.

Finally, if your business has exposure to interest rate changes, complete a sensitivity analysis to understand how much in increased interest you can tolerate. Even if the market only expects an additional 75bp raise, you want to avoid a position where an additional 200bps could put your firm in jeopardy. We have seen drastic negative market reactions as various national banks suggest rate increases could continue into next year. If your analysis reveals that rates are nearing unsustainable levels for your bottom line, consider locking in a fixed rate today.

Needless to say, we are in a difficult economic environment. With growth grinding into recessive territory, the fundraising environment has grown increasingly challenging. A strong level of liquidity will be critical for businesses to get through this period, particularly when this liquidity is yield-generating so that its real value is not reduced too severely by inflation.

Despite all of the negatives we are seeing in world 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 stocked for the next 12-18 months, you will likely be able to capitalize on new projects and investments that arise from competitors’ inability to execute on the above.

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