August 14, 2025
News about inflation has been leading headlines for the past few months, most often linked to stories pertaining to United States (US) President Trump’s fluctuating tariff policy and talk of a “trade war”. In fact, inflation has been
a hot topic since the Covid-19 pandemic, which caused a surge in demand for goods and massive government spending, leading to higher prices.
While US inflation has moderated significantly from its peak in June 2022, when it hit 9%, it’s still above the US Federal Reserve's (Fed’s) 2% target, and is currently approximately 1% above the pre-pandemic average. For this reason, the
Fed is cautious about lowering interest rates too soon, as it could trigger more inflation. While we may see an uptick in inflation later this year, we believe that inflation will moderate somewhere above target in the long term. This has implications
for stocks, bonds and alternative investments.
Impact on investments
Higher inflation affects both stocks and bonds because it influences interest rates and monetary policy. For stocks, it typically increases costs and creates uncertainty. Higher rates increase the cost of debt for companies, which can reduce profitability
(lower earnings), slow down expansion or investment, and lead to more conservative strategies. Furthermore, as stock prices represent what investors expect a company to earn in the future, those future earnings aren’t worth as much in the present
when interest rates are high. (This is especially impactful for growth stocks, which rely heavily on earnings far into the future.)
For bonds, it reduces the real value of fixed payments and causes yields to rise, which lowers prices. The result is that stocks and bonds have a positive correlation with regards to inflation. This means that both stocks and bonds can fall at the same
time, as we saw in 2022. Given current elevated inflation levels, we are unlikely to see the stock and bond correlation flip back to negative without a commensurate roll-over in inflation.
Equities and interest rates
The era of very low real interest rates post the 2008 global financial crisis has ended. Labour costs and prices have risen at the fastest pace in 25 years and interest rates are higher.
This has implications for equities. Higher yields tend to lower equity valuations. This could benefit value stocks. Small caps and emerging markets are also attractive relative to their historical rates.
Bonds and real returns
This also has implications for bonds, as rising interest rates mean more volatility and lower long-term real returns. Most bond coupon payments do not increase with inflation. In addition, bond yields tend to rise when inflation is moving higher. The
result is both a temporary decline in the price of bonds and lower long-term real returns.
At CC&L Private Capital, we have expanded our credit strategies to cover more areas of the world as well as different types of investments by including emerging market credit, North American high yield, and mortgages. This gives investors a broader
range of fixed income exposure through a diversified portfolio of attractive credit, offering attractive yields without increasing portfolio volatility over time.
Alternatives investments
In high-inflation environments, the traditional 60% stock / 40% bond portfolio can experience larger drawdowns, as both stocks and bonds will likely suffer simultaneously. In fact, this is precisely what we saw in 2022.
Alternative assets, like real estate, infrastructure, and private loans are typically less sensitive to broader economic risks, including inflation. This is because real estate rental income tends to rise with inflation; infrastructure contracts often
have inflation adjustments; and private loan payments are often variable and increase with inflation.
These assets generally offer strong returns (coming most often from income) and relatively low volatility, making them appealing, long-term investments. While they typically have reduced liquidity and longer deployment timeframes, we carefully manage
these factors within pooled funds.
Hedge strategies are another liquid alternative asset class. While they don’t directly hedge against inflation, they do offer another option to bond exposure, which is most negatively affected by inflation.
Conclusion
Inflation will likely be higher over the short term, but not at the disruptive levels we saw in the 70’s and 80’s. Our long-term inflation expectation in Canada is for a 2.5% increase in prices. This is higher than the last 25 years, but still
moderate.
It's important to review your asset allocation regularly to see how inflation might impact your portfolio's ability to meet your financial aspirations. More conservative investors with a larger percentage of their portfolio in fixed income are more susceptible
to lower returns as inflation rises. We have many tools to assess the tradeoffs you face as an investor under different market and economic conditions. While the future is uncertain, we can assist you in making informed decisions that consider risks
like inflation, among others.