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Canadian Inflation Rates – How To Protect Against Hyperinflation & Avoid Debt

Are you ever surprised by the cost of your groceries when you go to check out? Do you do a double-take when you see the rising cost of home prices? Do you question the barista when you hear the price of your regular coffee? 

If it feels like everything is getting more expensive that’s because….it is! The cause of the rising prices is inflation. 

What Causes Inflation?

Inflation is a way to measure the rise in the price of goods and services over time. Inflation can occur when there is an increase in demand for a particular product or service which in turn drives the price up. 

Or, inflation can be the result of the increase in costs associated with producing an item. If it costs more to create something then the seller will have to charge the customer more money to recoup their costs.

Hyperinflation versus stagflation

In addition to good old regular inflation, there are other kinds of inflation like hyperinflation and stagflation. 

Hyperinflation is the rapid increase of prices. It’s like inflation on steroids. Hyperinflation can occur when the demand for a good or service greatly exceeds the supply. For instance, if there was a gas shortage during a long weekend in the middle of summer when everyone wanted to travel. 

Stagflation, also referred to as recession-inflation, occurs when there is a high level of inflation for a sustained period of time accompanied by no economic growth and high levels of unemployment. While a gradual level of inflation is normal, countries want to avoid hyperinflation and stagflation.  

Causes of Inflation in Canada 

An article by the Bank of Canada states that “the economy works best when inflation is stable and predictable.” Unfortunately for Canadians, and the rest of the world, the last year and a half has been anything but predictable. A global pandemic has created a situation of instability and unpredictability. 

According to Statistic Canada, inflation hit 4.1% in August of 2021, the highest it has been since 2003. Some of the goods that have seen the largest rise in inflation include vehicles and gasoline prices. This is partly due to lower production in oil-producing countries during the pandemic. 

This is also because the current price of goods and services are being compared to prices during the height of the global pandemic. At this time few people were travelling, commuting, or even leaving their homes. The price of most things were at a low. Today, as more and more people get back to some form of “normal,” demand for goods and services are going up and so are prices.  

Raising salaries can also increase inflation. When it costs more money for business owners to pay their employees, they often have to raise the price of their goods or services in order to cover the difference. 

How is Inflation Moderated in Canada?

Inflation can have a large impact on all Canadians; however, the Bank of Canada suggests that “Canadians usually don’t pay much attention to inflation.” This is because inflation in Canada has largely stayed around 2% for the last 25 years. This is largely thanks to the Government of Canada and the Bank of Canada who agreed in 1991 that a low, stable, and predictable inflation rate that consistently stays around 2% is good for Canadians. 

Since this time, the Bank has done a good job of keeping inflation close to this target. To do this, the Bank of Canada has to raise or lower its key policy interest rate. If inflation starts to creep up above 2%, the Bank can raise the policy rate. This in turn can cause Canadian banks to increase their interest rates on things like mortgages and loans. 

When interest rates go up, Canadians typically aren’t inclined to borrow as much and spending decreases. When spending decreases, companies want to find ways to encourage customers to purchase, so sometimes they will decrease prices or if they increase prices it will be at a slower rate. As a result, inflation decreases. 

How Does Inflation Affect me?

When inflation is high, Canadians can expect to feel it in their wallets. Whether it’s a few extra dollars to fill up your tank or your shopping cart, your money simply won’t stretch as far. In 2021 Canadians are feeling the effects of inflation. A survey by CIBC found that 60% of Canadians are concerned about the cost of inflation and the rising cost of living.  

How Does Inflation Affect Canadian Debt?

If you are trying to pay off a large amount of household debt, rising inflation can make this task more difficult. Higher inflation means an increase in the costs of most goods and services. When the price of everything increases, your purchasing power decreases. If you need to start spending more money on groceries, gas, and life’s necessities, then you have less money left over for debt repayment. 

Rising inflation can also result in higher interest rates. If you are in a situation where you have to borrow more money and Canadian inflation rates are on the rise, then you can expect to pay more in interest. 

With the Bank of Canada interest rate predicted to increase in 2022, economists suggest that rising borrowing costs will be the number one issue facing the Canadian economy. Even a one or two-percent increase in interest rates could put Canadian homeowners into a vulnerable position. As rates increase, more of the household income will have to go to mortgage repayment leaving less money available for other things.  

We Are Here to Help

If you are one of the 60% of Canadians feeling concerned about increasing inflation or the rise in interest rates, reach out to a Licensed Insolvency Trustee (LIT). A LIT can walk you through your debt management options and work with you to develop a plan to move forward. You don’t have to deal with your debt or debt repayment journey alone. Contact a LIT at Allan Marshall and Associates or give us a call at 1(888) 371-8900. 

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Scott Marshall BBA, C.I.R.P, L.I.T

Scott is serving as Vice President and managing partner of Allan Marshall & Associates Inc. since obtaining his License as a Trustee (LIT) in 2003. Scott graduated with a Bachelor of Business Administration (BBA) from the University of New Brunswick and is an active member of the New Brunswick business community. In past years, Scott has been a valued member of the Wallace McCain institute.