Central banks and government out of touch with Main Street when it comes to rising cost of living

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Nothing makes our central bankers, academics and government officials sound more out of touch with Main Street these days than when they talk about low levels of inflation. The problem is that ultra-low interest rate policies justified by CPI tracking don’t seem to help much when income levels are stagnating and asset prices are surging.

The most glaring problem is housing affordability, as home prices have skyrocketed well beyond the reach of the average person. Take Toronto, for example, where in the midst of the biggest economic contraction since the great Depression prices have rallied more than 20 per cent. It now takes more than 10 times the average income level in Canada’s largest city to buy a house, slightly lower than the astonishing 12 times in Vancouver.

Meanwhile, it doesn’t look like this situation will improve any time soon, given that construction costs are rising. Lumber prices are up more than 60 per cent to record highs this year adding more than US$24,000 to the price of the average new U.S. house, according to the National Association of Home Builders. Here in Canada, we’ve heard the number is similar, with about $30,000 being added to the average price of a new home.

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When looking at the day-to-day costs all one has to do is go into the grocery store to get a good picture of the current environment. According to a recent UN report, global food prices have now hit a seven-year high. Closer to home, the latest Canada’s Food Price Report shows that food costs increased 2.7 per cent last year with an expected 4.5 to 6.5 per cent increase in meat, 3.5 to 5.5 per cent in bakery, and 4.5 to 6.5 per cent in vegetables this year.

If you have filled up your vehicle recently you may have also noticed a huge spike in the cost of gasoline. According to Statista, the average Canadian pump price for regular gasoline was $1.18 per litre in February, up from $0.778 April lows last year. This is also a 6.5 per cent increase over January and despite the ongoing lockdowns it is now five per cent above the February pre-pandemic level, according to Statistics Canada.

According to U.S. data, used-vehicle prices were also up nearly six per cent month-over-month in March and 26 per cent from last year’s pandemic lows to a new record high, according to the Manheim Used Vehicle Value Index. The same report found used car sales were up 117 per cent from last year while total new vehicle sales were also up 59.7 per cent over the same period. Here in Canada, according to JD Power, vehicle prices hit an all time high in Canada back in January, with the most popular vehicle loan term being 84 months.

Given enough time, these cost increases will have a material impact on the quality of life of those living on fixed or stagnant incomes, whether they are working and raising a family or living off accumulated wealth in retirement.

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So what can be done to stay ahead of the game and protect one’s financial well-being and way of life as the cost of living increases?

One way is to ensure one’s investments are growing at a level higher than the pace of these increases.

This means keeping low levels of cash and always putting it to work. The good old days of laddered GICs are certainly not going to cut it especially when five-year rates are hovering around a paltry one per cent. Government bonds aren’t any better considering how low their yields are and the duration risk to higher rates.

We do like the outlook for commodities and commodity-related investments in this type of environment as they will help provide a hedge to higher costs of living. In addition, why not look at holding more U.S. dollar investments for some protection against higher import costs and our rapidly deteriorating fiscal position among both provinces and the federal government.

To make matters worse, we would expect tax hikes at all levels of governments in the years to come, so make sure that you have your house in order and have maximized the use of existing tax-saving vehicles and structures.

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Getting a job that keeps you ahead of inflationary pressures helps, too. The bad news is that these days, many of those are with the very governments that are championing low-interest-rate policies.

According to the Fraser Institute, public sector workers make 9.4 per cent more than private sector workers for the same work, they are at one-sixth the risk of job loss and are nine times more likely to have a pension that guarantees income in retirement, allowing them to retire 2.4 years earlier.

Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.