Inflation In Canada
Today, let’s talk about a topic is quickly becoming the hot subject of debate amongst the financial community and how Canada is being affected.
This issue at hand is inflation – a topic that has nearly been forgotten by many but has recently raised some red flags and can cause some serious damage if it get’s out of control.
Since this topic is so big, I’m going to split the material into two separate episodes – in the first, we’ll cover why inflation is spooking individuals right now and how inflation is even measured in Canada.
During the next episode, we’ll look at how inflation can affect you and how you can protect your finances.
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Also, the blog post for this page will include a whole bunch of links that will allow you to explore what’s happening with inflation in Canada further.
What Is Inflation?
Inflation has been at historic lows for well over a decade and many Canadians have kinda just forgotten that it existed – it’s been hovering around 1 to 2% since about 1992.
First of all, let’s do a quick primer for any of you that may have forgotten what inflation is – essentially it’s the rate of change of the value of money over a period of time – in other words, why prices usually increase over time or why older generations always complain about how expensive goods and services are now compared to when they were younger.
Inflation is central to so many aspects of our life – the most obvious is how the goods and services that you buy becomes more expensive. Not so obviously, it affects you in a slew of other ways too. It’s the benchmark that guides wages to increase, how much you’re paid from a pension, and seriously affects your investment portfolio.
The government also uses future inflation estimates to determine how much is paid out in benefits, how tax brackets are changed and much more.
It’s also important to point out that you can look at past inflation and expected inflation. Past inflation is what is typically measured while expected inflation is what we predict will happen in the future. Many economists argue that expected inflation is the more important of the two.
How it’s Measure
The Canadian Government and Bank of Canada keep a very close eye on measures of inflation. The main one that is used is called the Consumer Price Index also know as the CPI.
The CPI measures how prices change across Canada by using a complexed methodology that collects the prices of thousands of goods and services. This then gets boiled down into a single index that can be analyzed further if needed.
In this formula, a calculation is made that looks at the average proportion of goods and services that a household will consume – called a CPI basket. Doing this allows a more accurate measure changing prices affect what an average household purchases.
This basket is then compared to similar versions in previous time periods to see how prices have changed.
Analysists can also drill down into these numbers to see how inflation affects different areas in Canada or how certain goods or services have changed in cost.
The Bank of Canada also analyzes the Core Inflation rate which strips out the most volatile item categories to measure a steadier value. Doing this allows temporary irregularities like weather patterns affecting certain crops to be minimized.
The Bank of Canada
Now the largest policy goals of the Bank of Canada is to keep inflation within a band of 1 to 3% with a goal of 2%.
The BOC uses many techniques to keep the inflation rate within this range but the most common one that people fixate on is the policy rate or over-night lending rate. This rate is central to monetary policy and guides rates throughout our whole Canadian Financial system.
Right now this policy rate is 0.25%
Now going back to 1992, this is when the BOC changed their policy to focus on managing the inflation rates. Before that, inflation was all over the place and was especially bad in the 1970s where inflation was on average 9.2% per year from 1973 to 1976.
After the BOC focused on the inflation rate, it has been so well tamed that many of use don’t even care about it that much.
Inflation in Canada – Now
So that brings us to now and all of a sudden inflation is back on everyone’s radar.
All of a sudden, inflation numbers in Canada and in the United States have jumped. From April 2020 to April 2021, the BOC has reported that inflation grew at a rate of 3.4% and the American Fed reports an increase of 4.2%.
Markets responded with volatility and increases in inflation hedged investments – like gold.
The big worry is that all of the COVID-19 stimulus programs added a massive amount of money supply into the economy that will push up inflation.
The official response from the BOC was that this increase is temporary and in response to the economic recovery that is currently occurring due to the COVID-19 health crisis.
And if dive into the numbers, we see that when you strip out energy costs the rate is only 1.6% – which is not too excessive compared to previous data. For instance, the reported increase in gas prices was 62.5% – which the BOC reports as being the largest increase on record.
Some other changes include a decrease of 7.2% for vegetables with an over supply of tomatoes causing an impact and a 13% drop in cell phone plans attributed to data promotions.
And this is where we are right now – we hope that these inflation numbers are just a temporary correction due to the health crisis that we’re slowly coming out of but it’s not certain.
Continued inflation can cause some serious damage to our investments and can shake up the whole financial environment. So it’s important to keep an eye on how this issue unfolds
That’s it for today, but join us next week when we look at some ways that you can protect yourself from inflation and more.