No Chance of Inflation in Canada – Long Term
Do you really think we are in inflation? When was the last time you paid for something that costs less than it did a year ago?… Never, that’s right… here is Canada’s historical inflation rate
If you want to know whether the bond market expects inflation or deflation, you don’t need to be a rocket scientist to figure out… it is very simple.
The implied or expected inflation rate is the difference between the yield on a nominal Government of Canada bond and the equivalent maturity real-return (see definition below) Government of Canada bond. The chart below clearly shows that markets expect inflation to hover in the 2% range in the long-term.
Real-return bonds are Government of Canada bonds on which the principal and coupon are adjusted based on the inflation rate as measured by the Consumer Price Index. If inflation is increasing, then the coupon and principal on a real-return bond increases proportionally.
Deflation means persistent negative year-over-year change in Consumer Price Index… from a historical perspective, Canada had 2 bouts of deflation – both during the Great Depression of the 1920s/30s.