What Does Inflation Mean? Canadian Inflation Rates & The Bank Of Canada
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Canadian Inflation Rates Effects

Canadian Inflation Rates: How Rising Rates May Affect You

We have all experienced inflation. When you go to the grocery store and it feels like all of the produce has doubled in price since the year before. Or, when you go to the pumps and you’re shocked to see how much it costs to fill your tank. Inflation causes the cost of living to go up, which can make it more difficult to afford essential items, pay your bills, and have enough money left over to pay off debt.

This article will explain what inflation is, the main causes, how it might affect you, and what you can do if you need help trying to manage rising prices.

What is Inflation?

Simply put, inflation is when prices go up. It’s when your dollar decreases in value because things cost more than they used to. Ten years ago, you might have been able to go to the grocery store and fill your cart for $100. Today, it might take $200 or more to fill that same cart.

Nearly every product and service is affected by inflation whether it’s electricity, automobiles, food, or housing. While inflation is a normal part of economic growth and is even an indicator of a healthy economy, periods of sustained inflation can make it more difficult to afford the things we need.

What Causes Inflation?

There are two main causes of inflation:

1. Increased Demand

If everyone wants the same product or service at the same time resulting in a shortage of that product, then prices can increase. As a simple example, think what would happen if, come Christmas, every parent is vying to get their hands on the most popular children’s toy. If there’s more demand than there is supply, this can result in an overall shortage of that toy, pushing the cost of that toy sky high. Parents will pay almost anything to get that toy for their children.

Demand inflation typically occurs when there is more money in the system than goods and services. When unemployment is low and people have more discretionary income, then there can be a situation where there is more money than goods.

2. Increase in Cost

Inflation can also occur when it costs more money to create or produce a product or service. For example, if the cost of raw materials like lumber increases, then it will cost more to build a house, which means it will cost more to buy a house.

An increase in employee wages can also increase the cost of a product or service. If you need or want to pay your staff more money, then you will likely have to increase the price of your products or services in order to recoup lost income.

Hyperinflation and Stagflation

In addition to regular inflation which is normal, there are other types of inflation that are more concerning.

Hyperinflation occurs when there is a rapid increase in inflation. A rapid increase in inflation can be caused by an excess of money supply. This happens when a government prints too much money. A government might do this if it is running a deficit and it needs the money to pay its bills.

Hyperinflation can also occur if there is an extremely high demand for a good or service that is in low supply. On a small scale, you can think about the cost of toilet paper, hand sanitizer, or N-95 masks during the beginning of the pandemic. These items were flying off of the shelves and as a result, their cost skyrocketed. In the US, the cost of hand sanitizer prices jumped 53% between March 2020 and November 2020.

On a larger scale, countries like post-World War One Weimar Germany, and Hungary during the end of World War Two, have experienced some of the worst hyperinflation, leading prices to double every three days in Germany, and every 15 hours in Hungary.

Stagflation occurs when there is high inflation accompanied by little growth in the economy and high unemployment. When there is high unemployment, many people have less to spend. If there is inflation and rising prices when the economy is stagnant, this can be a recipe for disaster.

Stagflation occurred in many developed countries during the 1970s as a result of surging oil prices. High prices, high unemployment, and sky-high oil prices created the perfect storm.

What is the Canadian Inflation Rate?

The Bank of Canada aims to keep the inflation rate between one and three percent, with two percent as its target. It aims to keep interest rates low because having a stable and predictable rate of inflation is good for the economy. Economic stability and predictability allow people and businesses to plan and budget for the future rather than having to guess how much products or services are going to cost.

Consumer Price Index

The Canadian inflation rate is expressed as the consumer price index (CPI). The CPI is seen as the most relevant measure of inflation because it is composed of the goods and services that most Canadians are likely to purchase. This includes items like food, housing, transportation, clothing, personal care, furniture, and more.

If inflation rates continue to stay high, the Bank of Canada may get involved to bring them back to the two percent target range. This is done by raising the Bank of Canada’s key policy interest rate.

If the Bank of Canada raises its rate, then Canadian banks follow by increasing their rates on things like loans and mortgages. As interest rates go up, Canadians tend to borrow less and spending decreases. As spending and demand decrease, supply goes up and inflation rates go down.

How to Calculate Inflation?

If you’re interested in seeing how inflation has changed over time, you can check out the Bank of Canada’s inflation calculator here. The Bank of Canada has consumer price index (CPI) data ranging all the way back to 1914. You simply enter a dollar amount (e.g. $50) and the years you want to compare (between 1914 and 2021) and it will show you the inflation calculation. For instance, because of inflation $50 in 1930 is equivalent to $802.81 in 2021. A bag of apples that cost $5 in 2020, is worth $5.22 in 2021.

How Does Inflation Affect Me?

The global COVID-19 pandemic has highlighted the impact of inflation. After the prices of most goods and services (gas, travel, luxury cars) plummeted in early 2020, the prices of today seem extraordinarily high. This perspective is somewhat warranted.

According to the most up-to-date statistics from the Canadian Inflation Calculator, the current inflation rate of 4.4% is the highest rate since 2003. However, it isn’t really that far out of the realm of the ordinary – it just seems super high when we compare current prices to the unnaturally low prices that we experienced at the beginning of the pandemic.

So, what is contributing to the current rise in inflation rates?

Well, after over a year of stay-at-home orders and other restrictions, Canadians are resuming some form of “normal” life and they want to buy things. Because most people spent the majority of their time indoors with little to no opportunity to travel, attend concerts, or dine-in at restaurants, some Canadians were able to save up their money. Now, people are ready to spend that money. This is putting an increased demand on manufacturers and retailers who are struggling to keep up.

What does this increase in demand and struggle to keep up mean for you?

It will cost more to eat and travel

It means that when you go to the pumps to fill up your tank or you go to the grocery store to fill up your cart, you’re likely going to notice the increase in cost. Your dollar simply won’t go as far.

You will have less money for debt repayment

If you have to spend more money on the essentials of life, it means you’ll have less money to do other things like pay off your debt or invest.

It may cost more to buy a house or borrow money

If inflation continues and the Bank of Canada has to step in and raise interest rates, it will start to cost more to borrow money. Whether you want to borrow for a mortgage, a new car, or a personal line of credit, if interest rates go up, it’s going to cost you more.

For those that are just struggling to get by, increased inflation, unfortunately, can lead to higher amounts of Canadian debt.

We Are Here to Help

If you are feeling the impact of inflation and you’re worried about your growing household debt, reach out for help. A Licensed Insolvency Trustee (LIT) can help you to understand the different debt management options that are available to you. You don’t have to navigate your debt alone, contact Adamson and Associates for a free, no-obligation consultation. You can give us a call at 519-310-JOHN (5646) or reach out online.

John Adamson, CPA, CMA

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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