Inflation rate's slight drop 'doesn't mean anything yet'

However, it does provide chance for advisors to reconfirm clients' financial plans

Inflation rate's slight drop 'doesn't mean anything yet'

The inflation rate may have dropped slightly in September but it’s not enough to cause advisors to rejoice yet because it’s still unclear whether inflation has peaked or just temporarily pulled back.

“It really doesn’t mean anything at this point. It’s just one month’s numbers and it’s only down 0.1%, though it would be nice if that would continue,” Scott Sather, a Regina-based financial planner as well as portfolio manager for Awaken Investments with Aligned Capital Partners, told Wealth Professional.

Yesterday, Statistics Canada announced that Canada’s September consumer price index (CPI) rose 6.9% on a year-over-year basis, marking the third consecutive monthly slowdown in inflation. While gas prices dropped in September, Canadians were still feeling the pinch from increasing food prices, and furniture and passenger vehicle prices grew at a faster rate in September than August. Canadians were also still feeling the pressure from increased mortgage interest rates.

Sather noted gas prices have increased again since September, which causes concerns that the inflation rate will soon continue to climb.

“People are really starting to feel the pinch with inflation, more so than even a couple of months ago,” he said. “But, I feel there’s still more short-term work that needs to be done with interest rates. In the longer term, I feel like there’s not a lot that they can do without causing a lot more problems, whether that’s a recession with housing since mortgage rates are going up right now and that’s going to hit those who are renewing their mortgages or have variable or short-term mortgages.”

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Sather is telling clients to expect interest rates to climb more before they retract, but he noted that rising inflation is also causing concern for indexed items, such as the Canadian Pension Plan and Old Age Security.

On the other hand, he noted that fixed income is paying more as a global bond portfolio is paying at least 5.5% rather than 1% to 2%. Equities could also soon provide a higher return.

So, he’s reassessing clients’ risk tolerance and budgets, looking at whether they can handle increasing interest rates and inflation rates.

Erin Roy, a financial advisor with Edward Jones in Bayfield, Ontario, said her clients are also asking what’s going to happen. Given that no one can predict that, she said, “it’s an opportunity for us to reflect on our current planning and stress test our long-term plans using more rigorous assumptions, like higher inflation, to think about the complications of volatility and ensure that we’re setting ourselves up for success long-term with appropriate asset allocation.”

She suggested that advisors can also help their clients review their finances with their lifestyle choices to ensure their spending aligns with their priorities and values.

“Right now, it’s a time where we need to be thinking intentionally about how we are using our financial resources since there are certain trade-offs that families will make, and they need to be intentional about those trade-offs,” she said, noting that there is no one-size fits all as clients chose between vacations or topping up their tax-free savings accounts or renegotiating their mortgages.

At the same time, she noted some clients are receiving inheritances and others are getting retirement packages, which offer opportunities to review their financial plans.

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“This is an optimal time to reinforce our value as financial advisors by re-evaluating or, as in most cases, reconfirming the financial plan that we’ve already established with an expectation that there would be some degree of market volatility. We can demonstrate to clients that this current environment is within the expected of the volatility we’ve already projected,” said Roy.

“So, we’re probably seeing five to ten clients a day to have conversations and reassure them that that’re on track and this is part of what occurs in economic cycles, and then discuss how we can optimize their current situation as well as we can.”