Lexicon Financial Group Weekly Update 

Monday, April 18, 2022


Looking Back

Last week in the markets was a bit like the weather – one day you’re wearing shorts and the next day you need a jacket – hot and cold. Markets in the U.S. and Canada finished mostly lower in the holiday-shortened trading week.

The price of crude oil rose above $105 last week fueling the ongoing discussion about inflation. As we’ve discussed before, energy prices are closely linked to inflation, especially for food, manufacturing, and travel. If it needs to be shipped from one location to another, higher energy prices increase the cost.

To combat this, central governments are expected to continue raising interest rates. The Bank of Canada (BoC) was among the first to blink, increasing its policy interest rate by 0.5% last week. Markets are anticipating additional rate increases in Canada and other developed countries throughout the year. The BoC is also ending reinvestment and will begin quantitative tightening (QT) on April 25, 2022. (1) This is a way for a central bank to reduce the financial assets it owns by no longer buying them in the market place. Effectively, it reduces the amount of capital in the system. Theoretically, less capital (tightening of money supply) leads to reduced inflation.

Clearly, increased rates means that borrowing money is becoming more expensive. This has the potential to dampen economic growth as consumers spend less and businesses invest less. Policy makers have to walk a fine line – indeed, Goldman Sachs put odds of US recession at ~35% over next two years, which highlights the difficulty for the Fed in achieving a soft landing.


Looking Around

Unfortunately, there is still no real change in Russia-Ukraine situation. The war continues despite more than a few diplomatic manoeuvres and the growing number of sanctions against Russia. Like the ripple from a stone thrown into water, the war has added to market disruption especially in energy and the grain sectors.

Russia supplies about one-third of Europe’s natural gas. Any disruption in this supply could impact Europe’s economic growth. Ukraine also possesses significant oil reserves, but with a war, raging they cannot be regarded, as a reliable source should Europe elect to fully turn off the Russian oil tap. (2)

Oil prices are up about 15 percent or so since Russian military forces invaded Ukraine in late February. In fact, the Organization of the Petroleum Exporting Countries (OPEC) recently cut its forecast for global growth to 3.9 percent from 4.2 percent. That said, demand for oil could be under pressure in the longer term as pandemic-related lockdowns remain in place in China and inflation undermines the buying power of consumers globally. (3)


Looking Beyond

While global factors play a role in creating an inflationary environment, not all prices increase at the same rate. The prices of some items will be increasing in line with the average inflation rate. The prices of other items may be changing slower than the average inflation rate and even be declining. During a drought, for example, the price of fruit may go up, but will eventually come down when the drought is broken. The price of oil is high currently due to the war in Ukraine and the post pandemic demand but that can change. In fact, last week the U.S. government changed its domestic policies to increase the amount of ethanol used in gasoline, which should help lower the price of gas there.

Core inflation is a term that is bandied about because it excludes the food and energy sectors. As we have seen, food and energy prices can be volatile and actually mask the part of inflation that’s expected to persist going forward. By excluding food and energy prices, it provides a better signal of how much of the current inflation reading is expected to last. Policymakers use this information to set monetary and economic policy. (4)

On a positive note, there are signs that goods inflation, which has been the principal driver for inflation over the last year, might be slowing. The Federal Open Market Committee of the Federal Reserve has stated in terms of their Summary of Economic Projections that in 2023, inflation could be 2.7%.


Further Reading

Markets & Investing – Raymond James

What is Core Inflation?

What Happens If Interest Rates Increase Too Quickly?

Putin’s War Against Ukraine and the Balance of Power in Europe


The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.



  1. 1. Bank of Canada increases policy interest rate by 50 basis points, begins quantitative tightening, Bank of Canada, April 13, 2022
  2. Russia-Ukraine war by the numbers: Live Tracker. Aljazeera, Staff
  3. Russia to drive prices in short-term, but China, inflation and increased production loom, Daniel Graeber, Houston Chronicle, April 18, 2022
  4. Clearing up common misconceptions about inflation, Sabri Ben-Achour and Rose Conlon, Marketplace, April 18, 2022