Investing 101: The Impacts of Inflation

Starting with cash, which in a savings or GIC accounts, can be termed as short-term interest-bearing instruments. As short-term interest rates adjust with expected inflation, such securities can earn a floating real rate. Such-term interest-bearing instruments are considered zero-duration and inflation-protected assets, and therefore are attractive in a rising rate environment.

Moving on to bonds; rising inflation leads to capital losses as bond prices decline. If inflation remains within an expected range, short-term yields rise/fall more than longer-term yields. However, if inflation moves out of the expected range, longer-term yields rise/fall more sharply. The inflation jump recently seen was out of the expected range, but expectations have adjusted quickly.

Coming to our favorite asset class, equities; if inflation stays within the expected cyclical range, there is little effect on stocks as the market prices in expectations fairly quickly and companies can raise prices in-line with inflation to some degree. Unexpectedly high inflation might make central banks take action to slow down the economy by raising interest rates, which is what affects valuations of high-growth and highly leveraged companies. High inflation benefits those companies that can pass on inflation, which generally tend to be of consumer staples, financial and industrial sectors.

Lastly, for real estate assets, if inflation stays within an expected range, rental income and property values rise with inflation. On a positive note, higher than expected inflation leads to high demand for real estate, and vice versa when deflation occurs (opposite of inflation).
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It reports Friday. Last time they delivered weak numbers and a dividend cut. Plus, they face brutal competition..

Thinks it's primed to go higher because of energy demands globally. AI alone requires more energy. Even though OPEC's turning on the taps, there will still be geopolitical concerns (such as Iran-Israel conflict in June) that can spike the price of oil.