A tight labour market will have to loosen up in order to help reduce inflation rates, said Ilan Kolet, institutional portfolio manager at Fidelity Investments, during the Canadian Investment Review’s 2023 Risk Management Conference.

In 2022, inflation severely impacted the dynamic between stocks and bonds leading to a painful year, he said. “[Inflation] increases the correlation between stocks and bonds — there’s higher market volatility and there’s the potential for central banks to raise rates.”

Inflation has decreased from extraordinary highs in Canada and the U.S. to around three and four per cent, but to reach central banks’ ultimate goal of two per cent, will require a loosening in the labour market, as well as a slowing in wage growth and in services accounting for two-thirds of the inflation basket, he said.

Read: IMF lowering growth, raising inflation expectations for 2023

“Our view is stubbornly elevated or sticky inflation — not as high as it was — but roughly where we are right now is here for some time,” said Kolet, noting he expects to see inflation rates reach between medium and high three per cent at the end of 2023.

To fend off inflation and its impact on stakeholders, institutional investors have turned to commodities, he added, suggesting a balanced portfolio designed to combat inflation have a combination of fixed income, real estate, gold and commodities. “I think last year is a pretty good example of commodities perhaps being one of the few asset classes you can own or be overweight in the presence of unexpected inflation shocks.”

Kolet said he’s been surprised by the resilience of the Canadian economy in the face of adversity from high inflation. He used to work at the Bank of Canada, so explained that policy-makers won’t adjust the course they’ve set on until things change drastically. “Until there’s a meaningful slowing, I don’t think we’re going to get a change in the policy direction.”

Read: BoC raises key interest rate to 5%, expects slower return to inflation target

Most people care about the role of inflation in their day to day because of the incremental rise in the costs of items like groceries, he noted, but for institutional investors, inflation also affects the stock and bond correlation in multi-asset class portfolios.

“[When] you go to the mechanic, it’s not the part that’s expensive, it’s the person’s time. And the person’s time got a lot more expensive because wages pushed up a lot higher because the labour market is really tight. That’s a lot to digest.”

To put things into perspective, Kolet, who has researched inflation extensively throughout his career, said he never thought he’d see the day where inflation rates in Canada and the U.S. and Canada surpassed those of India and Mexico. “I never thought in my life I would say that.”

Read more coverage of the 2023 Risk Management Conference.