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Is the Inflation Fire Still Smoldering, Risking Another Flare Up?

For Condo Reserve Funds, the roaring 8+% inflation fire seems to have settled down, after a year of the Bank of Canada and US Fed pouring round after round of cold water – in interest rate increases. But is the fire still smoldering, risking another flare up? This is the question policy-makers will need to answer.

Inflation Fire

The Roaring Inflation Fire: Has It Settled or is It Still Smoldering?

The roaring 8+% inflation fire seems to have settled down, after a year of the Bank of Canada and US Fed pouring round after round of cold water – in interest rate increases. But is the fire still smoldering, risking another flare up? This is the question policy-makers will need to answer.

Canada’s Inflation Picture: Navigating Uncertainty

In the realm of Canadian economics, the recent spike in inflation to 3.3% in July—compared to the previous month’s 2.8%—has captured the attention of economists.  The seesaw effect that often accompanies efforts to bring inflation down toward its 2% target. This intricate dance reflects the challenges of maintaining a stable economy while managing inflation’s ebb and flow.

How much of the decrease from 8% is due to simple mathematics, compared to actual taming the inflation undercurrent? Interest Rates also have a direct impact on inflation through housing – mortgage and rent, hence a feedback loop. 

In Canada the housing market is much more interest rate sensitive than the US, with 5 year fixed terms, and a lot of variable rate mortgages. Will policy makers and governments tolerate a sustained housing down-turn if it’s needed to tame inflation?

US Inflation Insights: A Tale of Economic Resilience

In the United States, a different chapter of the inflation saga unfolds. Despite inflation’s presence, the consumer spirit remains resilient, evident in the buoyant sales of blockbuster movies, thriving concert attendance, and a record-setting single-day air travel count. This unwavering consumer confidence defies inflation’s constraints and emphasizes the importance of consumer sentiment in economic resilience.

Structurally, housing in the US isn’t that interest rate sensitive with 30 year terms being the norm. Especially when rates were between 1-2%, how much lower could they really go? The US market saw a lot of mortgages lock this in for the long-term.

Central Bank Strategies and the Inflation Landscape

Both the Bank of Canada and the U.S. Federal Reserve grapple with the task of steering their economies through the inflation landscape. While their strategies differ, the impact of inflation on Condo Reserve Funds remains consistent regardless of geographical boundaries.

Impact on Condominium Reserve Funds

Condominium Reserve Funds are not immune to the effects of inflation. As inflation rates fluctuate, the purchasing power of these funds can be impacted, influencing the ability to cover essential capital expenditures. The dynamic nature of the economy requires a careful balance to ensure that Reserve Funds are not eroded by the effects of inflation.

In this context, the importance of strategic investment choices becomes evident, and the importance of selecting the right GIC term becomes evidence.

The Role of GIC Investments

Selecting the right GIC term is one of the most important choices a Board can make. 3% rates seemed great a year go, but if you locked all of the Reserve Funds into 5 year GICs at 3% then, it wouldn’t look so good now.

Where do we go from here?

Looking Ahead: Navigating the Complexities

As we peer into the future, Condominium Reserve Funds remain central to the narrative of economic resilience and inflation management. Just as central banks carefully craft strategies to navigate economic uncertainties, Condo Boards and Property Managers play a pivotal role in safeguarding these funds and making informed investment decisions, such as opting for GIC investments.

The tale of two economies intertwined with Condominium Reserve Funds is a reminder of the intricate dance between economic fluctuations and financial prudence. Through careful planning, proactive management, and a keen awareness of economic trends, Condo Boards can ensure that Reserve Funds remain robust and capable of meeting the needs of the community.

The Market is littered with “experts” who prematurely called market tops and bottoms, with only a handful actually getting it right. Time after time, economists keep pushing back their “forecasted” interest rate decreases. The “higher for longer” bet keeps paying dividends.

The lesson? If it ain’t broke, don’t fix it. Until we see inflation comfortably sub 2% in both Canada and the US for a sustained period (minimum 6 months), and the GIC rates dropping after 2 years, we should stick in the short part of the curve – 1 to 2 year GIC terms. Maybe 12-18 months from now 5.75% GIC rates won’t look so good! The risk is certainly skewed to the upside in our opinion. They certainly don’t seem to be going down anytime soon.

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