Monday Market Minute | Aug 02, 2021

Inflation persistence challenges the transitory consensus

What Moved

StatsCan's July CPI report showed inflation holding at 3.7% year-over-year, confounding expectations of a moderation. The breadth of price increases widened — shelter, transportation, food, and recreation all contributed meaningfully. Base effects from 2020's price declines were fading, which meant that the "transitory" explanation was losing explanatory power. The BoC acknowledged the persistence but maintained its view that inflation would moderate as supply bottlenecks resolved, a position that market participants increasingly questioned.

Why It Matters

Persistent inflation above 3% changed the calculus for private market investors in multiple ways. Real returns on private credit yielding 7-8% compressed to 3-4% after inflation — respectable but below historical norms. Construction costs for development-stage projects continued to escalate, pressuring returns on projects underwritten with lower input assumptions. Most critically, persistent inflation made BoC rate hikes a near-certainty, which would repriced leveraged assets across the alternative investment landscape.

Signal to Watch

The BoC's September Monetary Policy Report would include updated inflation projections. Any upward revision to the near-term inflation path would accelerate the timeline for rate hikes and force a reassessment of portfolio duration exposure across private markets.

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