Filling up your car's gas tank, your grocery basket or heating your home might be getting more costly where you are. What's going on, and how can you brace yourself as costs of seemingly everything are going up?
Inflation rose to an 18-year high in September, with "transportation, shelter and food" the primary contributors to the jump.
What's Inflation, and How Does It Affect Your Wallet?
We've gone through a lot in the past 24 months, and COVID-19's impact on our economy has been significant.
Shawn Todd, fee-only Certified Financial Planner with Ecivda Financial Planning says, “there are a variety of reasons that prices can change upwards, from restaurants trying to recuperate from long lockdowns, to computer chip shortages driving much higher vehicle prices.
"Inflation is really the increase of a price of goods within the broader economy and can actually mean that good things are happening in the financial system. Higher prices of goods are often signs that consumer demand is high, that companies are growing and profitable, and that the economy is expanding. Currently we are experiencing a mismatch between supply and demand which is causing inflation to rise."
According to a BNN report, 45 per cent of Canadian firms "anticipate inflation will be above 3 per cent over the next two years."
Does Past Inflation Teach Us Something About Today?
Janet Gray, Fee-only, Advice-only Financial Planner with Money Coaches Canada says: “We have all heard stories how our grandparents earned $500 month and could buy a house for $20,000. Inflation has an upward trend most years - but not all. The CPI (consumer price index) is a generalized basket of goods and is used most often."
Although current inflation in Canada is around 4-5%, here's how it's looked the last few years:
|
Year |
Inflation Rate (%) |
|
2020 |
0.72% |
|
2019 |
1.95% |
|
2018 |
2.27% |
Janet points out that, “Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly."
- Since 1960 average inflation is about 3.65%
- Lowest at 0.16% in 1994
- Highest in 1981 at 12.47%
- A $100 basket of goods in 1914 would cost $2,377 in 2021The Consumer Price Index in 2002 was 100, in 2021 it was 142.6
How to Manage Periods of Inflation
During inflationary periods, Shawn and Janet offer this advice:
- Revisit your budget and see where to make adjustments. This is something you can control.
- Prioritize fully funding your emergency fund. Consider a higher interest savings account to earn more on your short-term savings.
- If the areas where you spend more (e.g. groceries) have increased, you may need to reduce spending in other areas to compensate.
Sticking to Your Plan
Finally, Shawn cautions that predicting the future is difficult.
"Inflation will come and go and will fluctuate many times throughout your lifetime. Having a well-planned strategy and financial plan will always help ease any concerns. Reacting to economic underperformance is the same as reacting to economic surges. The key to success is through staying educated personally on these topics, and by addressing any gaps in your own plan now as opposed to later."
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