Was Inflation transitory?

By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

Inflation is coming down in Canada and the U.S. And one can argue that the rate hikes have had little effect. After all, Canadians and Americans are spending money, and employment is strong. The economy has been very resilient. Perhaps inflation was transitory after all, caused by the pandemic and the invasion of Ukraine. This is not the traditional inflation fight script. The economic soft landing argument is getting more support. Was inflation transitory?

Total inflation in Canada is back ‘on target’ in the 2% to 3% range.

That said, core inflation is still sticky.

From this MoneySense post

According to Statistics Canada, the June slowdown was driven primarily by a year-over-year drop of 21.6% in gasoline prices. Meanwhile, the largest contributors to the rise in consumer prices are food costs — which rose 9.1% in June — and mortgage interest costs (up 30.1%).

It’s likely a very good guess that rates are staying higher for longer. The bond market is certainly suggesting that as well.

The 5-year remains elevated.

Fixed-rate mortgage holders will likely be resetting at higher borrowing costs over the next 2 to 3 years – adding several hundred dollars a month to the typical mortgage payment. Of course, that takes money out of the economy and money that would have been spent on goods and services.

Next year may be sunnier than forecast

In the Globe & Mail, Ian McGugen offered a very interesting post. Ian looks to one of the most optimistic economists, and that is a growing group.

Jan Hatzius, chief economist at investment banker Goldman Sachs, has set himself apart from the crowd in recent months by declaring that the United States will not sink into a recession.

Mr. Hatzius has won awards for his forecasting accuracy and argues that a downturn isn’t likely when jobs are plentiful and disposable income is growing. But keep in mind that most of Wall Street disagrees. A recession over the next 12 months remains the most likely scenario, according to a recent Wall Street Journal survey.

The crux, from that post …

This isn’t the way things usually work in an inflationary cycle. The classic pattern begins when demand for goods and services surges past what the economy can produce. The central bank then raises interest rates to crush activity, the economy slides into recession and inflation recedes.

This time, though, inflation is plunging while the economy continues to purr along. That suggests that much of the inflation that developed nations experienced wasn’t the result of excess demand, but rather of supply disruptions during the pandemic. Maybe inflation really was – to use a much-abused term – transitory.

Inflation and the economy and real estate has fooled most everyone over the last 3 years. It has not been a good time to be in the prediction business. And those who have invested based on predictions have likely paid the price. Too many are waiting for the recession that refuses to arrive.

Every week I work with readers and suggest (not advice) that they consider dollar cost averaging into the markets. Take out the guess work. Take out the emotion.

I’ll stick with my main theme that any dark economic forces are moving in slow motion. There is economic stress in play, but we don’t know what will be the extent of any economic damage. We could get a soft landing; we could get a meaningful recession.

The key is to be prepared for most anything.

Our U.S. stock portfolio continues to outperform

I was back on Seeking Alpha with a look at the performance of our U.S. stock portfolio.

Our dividend growth portfolio continues to outperform.

You should be able to read that post as one of 3 free reads on Seeking Alpha.

Those index skims were added to three stock picks in Apple, Berkshire Hathaway and BlackRock. It is a successful demonstration that we can build a simple and very successful stock portfolio.

I am working on a post by request – how would I build the U.S. stock portfolio in 2023?

Dale Roberts is the owner operator of the Cut The Crap Investing blog,  and a columnist for MoneySense. This blog originally appeared on Cut the Crap Investing on July 23, 2023 and is republished on the Hub with permission.

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