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Trying to quantify inflation is challenging at the best of times. But it’s made more difficult in today’s environment as tariffs and oil price shocks have not yet found their way into the CPI data.
Economists have been confounded trying to explain the mismatch in CPI data versus expectations. Could it be that diminished demand and a robust competitive environment have subdued price action? Could it be future Fed Chair Warsh’s position that higher interest rates are killing demand? Or perhaps previous post-Covid price hikes killed forward demand, causing a global reset that is currently winding its way through the CPI data.
For years, the dominant narrative has been that higher interest rates inevitably “kill” economic activity. But what we’ve seen instead is more subtle and more important for investors. Demand hasn’t collapsed. What has changed is what people are willing (and able) to pay.
Housing is the clearest example. Transactions slowed not because people stopped wanting homes, but because prices never adjusted fast enough to reflect higher borrowing costs. In many markets, activity didn’t fall off a cliff; it simply froze. That’s not a demand problem; it’s a pricing problem. The same dynamic is visible across parts of commercial real estate, private equity, and even equities trading on old valuation assumptions.
For investors, this matters because repricing doesn’t happen in one dramatic moment. Assets often look “cheap” relative to recent history while still being expensive relative to current cash‑flow reality. In a higher‑rate regime, patience and selectivity matter far more than speed. The biggest risk isn’t missing upside; it’s anchoring to yesterday’s prices. The market adjusts but rarely in one preferred timeline.
If you’ve been waiting for a textbook recession with rising unemployment, collapsing spending, and broad credit stress, you may be waiting a while. Today’s economy doesn’t behave like prior cycles, because households and corporations entered this period with unusually strong balance sheets.
Think about U.S. homeowners who are locked in long-term (30-year) low-interest mortgages. Large companies refinanced aggressively before rates rose. That has muted the immediate impact of higher rates and shifted economic stress toward narrower pockets: lower‑income consumers, small businesses, commercial property owners, and rate-sensitive sectors.
For investors, this means downturns may be more uneven, more prolonged, and less dramatic than past recessions. But it doesn’t change base-case dynamics that recessions are less risky. Instead of sharp collapses followed by rapid recoveries, markets may grind through long adjustments where returns depend more on cash flow, balance‑sheet quality, and pricing power than macro timing.
Headline inflation may be relatively stable, but that doesn’t mean it has disappeared. It has simply moved into harder-to-see places. Services inflation (i.e., restaurant meals, travel, etc.), insurance costs, healthcare, housing repairs, and labor-driven expenses remain sticky. These are precisely the categories most relevant to retirees on a fixed income.
The bigger issue is structural. Deglobalization, energy transition spending, aging populations, and geopolitical fragmentation all point to more inflation volatility than investors witnessed during the 2010s. That doesn’t mean runaway inflation, but it does suggest that a “low and stable” era should not be assumed.
From a portfolio perspective, this weakens the traditional role of long‑duration bonds as inflation hedges (see our May 11 Macro-Economic Research Report for a more detailed explanation). Long-term bonds with maturities greater than 10 years that rely on distant cash flows are more exposed, while assets with pricing power or shorter cash-flow cycles tend to be more resilient. Inflation isn’t a one‑time shock anymore, it’s a recurring risk factor.
Geopolitical headlines are seductive but dangerous. Markets are very good at ignoring geopolitical risk – until it can no longer be ignored. Think about the future impact on gas prices if the war with Iran takes longer to resolve than initially anticipated. The challenge for investors isn’t predicting the next conflict or policy shift; it’s recognizing how geopolitical friction changes the investment landscape over time.
Supply chains are becoming shorter and more redundant. Governments are investing heavily in defense, infrastructure, energy security, and domestic manufacturing. Capital is flowing less freely across borders, and political considerations increasingly influence economic decisions. These are slow, structural changes. They are not day-trading signals.
The practical takeaway is this: Geopolitics should shape portfolio construction, not portfolio betting. That means emphasizing resilience over precision, avoiding excessive concentration, and recognizing that volatility may come from unexpected places. Preparing for uncertainty is far more reliable than trying to forecast it.
Richard Croft is Founder, Chief Investment Officer, and Portfolio Manager of R.N. Croft Financial Group Inc.
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Content © 2026 by R.N. Croft Financial Group Inc. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently, and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
R N Croft Financial Group Inc. is a Licensed Discretionary Portfolio Management and Investment Fund Management company serving investors and investment professionals across Canada since 1993.
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