Anticipating inflation: Five perspectives

To introduce the topic of this blog, we will start with a premise expressed by politician Pierre Poilievre that highlights the effects of inflation on the average consumer versus the owner of real estate assets, the difference is stark: "If you live off an inheritance, inflation balloons your assets and makes you richer. If you live off a salary, inflation balloons your cost of living and makes you poorer."

This quote is supported by numerous studies in economics, including one from Standford University: Residential real estate has historically been a safe haven for investments during inflationary periods. The Wall Street Journal makes this point more eloquently: "Owners of residential and commercial real estate are often better off in times of rapid inflation than owners of stocks or bonds, economists say. Office, retail and apartment rents are generally tied to consumer prices and rise with inflation, boosting property income. Inflation also makes construction more expensive, which benefits property owners because they can expect less competition from new construction."

In Canada, to cope with high inflation, nearly half of consumers say they are buying less and buying more items on sale according to Inflation: consumers are more pessimistic, says Bank of Canada | LesAffaires.com. Most consumers and businesses expect Canada to enter a recession, new Bank of Canada surveys show, but their views on short-term inflation differ. From a consumer perspective, this recession would mean wages not keeping pace with inflation, while from a business perspective, it would mean interest rates continuing to rise. What these two statements reveal is that Canadian consumers as well as businesses are not providing a concrete solution to the relentless rise in prices. The reason this is happening is that the average Canadian consumer will reduce their standard of living in order to cope with the Bank of Canada's inflationary policy, while businesses (especially retail businesses) tend to aggressively raise their prices. The direct consequences of this on consumers and homeowners are as follows A net decrease in consumer living standards and an increase in corporate profits.

One way to deal with inflation is to invest in your home in a way that maximizes your return on investment, i.e. by minimizing the costs of your projects. One way to reduce these costs is to purchase the necessary materials through your company (if you have one) in order to benefit from tax deductions. Another way to reduce these costs is to subcontract the labor required to complete your work through the JobFlash labor pool. These workers work at a competitive hourly rate (an hourly rate is very advantageous for a client as opposed to a fixed price per contract and should be considered if you are considering minor work that can be done by JobFlash workers). Another strategy put forth is the action of buying and reselling residential homes or unit buildings quickly which allows you to increase your profit regardless of rising interest rates, since all the profit will go directly to you minus the marginal tax rate on your capital gain. The next three topics will be to elaborate on the different strategies or angles of attack to deal with inflation:

Do what the average consumer does, reduce consumption:

We know that this is the approach of most consumers in Canada and it is the most intuitive one, since we know that in order to make additional profits, we must either reduce our expenses or increase our revenues. The problem with this approach is that it not only reduces the standard of living for the individual, but is not sustainable for the average self-employed person, as it is often very difficult to cut our operating costs.

Investing in your residential home:

Whether you are planning to sell your home to buy smaller, when the children become independent, or to buy larger, when you are planning to expand your family, all reasons are good to increase your home value. Many articles talk about the safe haven value of residential homes, even in an inflationary environment. It is widely known that a house is one of the few assets that sees its value increase over time and in a normal (or inflationary) context. It should be noted that Canada is still suffering the economic repercussions of the COVID-19 and the war in Ukraine, which will cause a recession in the near future. Economists agree that the earliest this will happen is in the first quarter of 2023. From that point on, it would be wise to hold on to your real estate assets until this stage of the economic cycle is over, because during a recession, there is less demand to buy your property, so the sale price must decrease to accommodate this low number of buyers.

Follow a budget:

With the rising cost of living, there are many things we need to do such as following a budget. Budgeting not only gives us peace of mind, but also makes us financially aware of our expenses in relation to our earned income. You may be surprised at how small daily expenses or bad habits can become large amounts over the years. Making a budget can help you to:

- Set spending limits

- Find ways to pay off debt

- Cut costs and save more

- Have more money for what's really important to you

- Feel in control of your finances

- etc.

According to Making a Budget - Canada.ca, knowing the difference between your needs and your wants is the key to making a smart budget, so simply list all your sources of income and then track your expenses via your banking application by separating them into different items (or rows). This first exercise will allow you to have an overview of your monthly expenses and will allow you to make arbitrary decisions about them. The goal of all of this will be to reach a financial goal that you have set beforehand or after having an overview of your finances. 

Invest in your education:

Another good way to take advantage of inflation is to invest in yourself, whether it's enrolling in a skilled trade school, planning a return to school, or going for advanced training, all of these are good ways to desire to get to the next level in your life or finally decide to follow your passion. You will be able to improve skills that you have never used before and to emancipate yourself in a field that is closer to your passion while being more lucrative.

Invest in bonds or stocks:

• "The impact of inflation on bonds is twofold. First, higher inflation is accompanied by higher central bank policy interest rates, which in turn affect bond interest rates. The result is a decline in bond prices, which translates into negative returns. Then, of course, inflation erodes the value of future payments generated by bonds."
• "When it comes to stocks, the impact of inflation depends on a number of factors. The basic argument for investing in stocks, at least in theory, is that over the long term, returns will always equal or exceed the level of inflation. In the event of high inflation, some might choose to focus on specific sectors, such as commodities or real estate, or select companies in areas with little competition, which gives them more control over the price of their products. That said, sensitivity to inflation and interest rates can vary from sector to sector."

(Investing in a Time of Inflation: How to navigate? | LesAffaires.com)

In conclusion, we have seen that residential property is a safe haven in an inflationary context, but less so in a recessionary context, since demand tends to decrease and the constant supply must be readjusted downward. It is also important not to fall into the trap that 50% of Canadians do in an inflationary context, i.e. reduce their consumption and consequently see their standard of living reduced. We have also learned that certain strategies such as following a budget or investing in property or in education are more advantageous than ever in the context of inflation.