Inflation and Everything That You Need To Know About It

Inflation and Everything That You Need To Know About It

Inflation and Everything That You Need To Know About It

“When I was your age a cup of coffee cost ten cents!” – An Angry Granma

We’ve all heard someone complain about how prices are so much more than they used to be. This is often followed by a lengthy story about how amazing the past was…unfortunately, they are right about how prices increase over time. This phenomenon is called inflation. Most people are familiar with this concept, but don’t know what causes it and how it really affects them. However, by the end of this article you’ll know the answers to these questions and more!

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So What is Inflation?

Technically, inflation is the increasing general price level in an economy over a period of time. In other words, what you get for your money will be less in the future. For example, if inflation stays at 2%, then a $25,000 vehicle will cost $30,474.86 in ten years; a 21.9% increase in price. You can play with this nifty calculator from the Bank of Canada website that lets you see the impact of inflation.

Inflation is generally guided by the Bank of Canada, whom have a total inflation target of 2%. Inflation is measured by the Consumer Price Index, which simply compares a group of priced goods and services that an average Canadian household consumes and then compares this to an older and similar group. The difference between these groups or “baskets” is how prices have changed over time. These baskets of goods and services is periodically adjusted and differs by Canadian region. A stripped down “basket” is also used that excludes volatile items like energy, food and mortgage interest; this is called The Core Consumer Price Index.

Inflation that grows by enormous amounts is called hyperinflation. During hyperinflation, prices are increasing so fast that people spend as much money as they can because goods and services will cost much more in the future. For example, in 2008 Zimbabwe suffered from inflation that increased prices by 79.6 billion percent in just one month. This is such an uncontrollable amount that the currency had to be replaced. The picture used in this article is from another instance of Hyperinflation, German children are playing with bundles of worthless cash.

So far we’ve focused on inflation, but prices can also decrease over time, this is called deflation. Deflation does not occur as much as inflation, but it was occured during the Great Depression and modern Japan.

 

What Causes Inflation?

There are many reasons why inflation occurs, but Economists generally consider there to be two main sources of inflation, being; cost-push and demand-push. Cost-push occurs when the underlying costs of producing a good or service increases, for example, when labour or raw material costs increase. Demand-push is when an element of the economy increases the demand for a product to a point that it’s price increases. Common examples of demand-push are; increases in the money supply (more money is available to be spent), increased government spending, positive economic outlooks and weaker domestic currency.

 

How Does Inflation Affect You?

Thankfully, since the early 1990s Canada has had a pretty stable inflation rate, but there are still ways that inflation can negatively affect you. The biggest way is through your regular income, if your annual wage increase is less than the future estimated inflation rate than you’re receiving a pay cut! For example, if inflation is expected to be 2.5% and you only receive a 1% increase than you have receive a pay cut of 1.5% for that year. So as a rule, your income needs to increase with the rate of inflation to keep you financially stable.

Another way that inflation affects you is through your savings and investments. If your investments grow by 1% and inflation is 2.5%, then your investments have shrunk by 1.5%. This is why it’s important to find a suitable investment that beats inflation.

There are other ways that inflation can affect you, but these are the main ways that Canadians are affected.

Well that’s it for this week, thanks again for reading about inflation and how it affects you. If you have any questions please contact me at info@ffcoach.ca or 647-289-0012. Also, please don’t forget to sign-up to our super awesome newsletter below! See you next week!!!

 

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