What is Inflation?

If it seems like prices are going up and everything is getting more expensive, you’re not imagining it. From gas prices to grocery runs, shopping for goods and services, prices are on the rise and your budget may be feeling it. What’s the culprit? Inflation.

What’s inflation?

Inflation refers to price increases that occur across various sectors over a period of time. The effects of inflation result in losing some purchasing power. In other words, you’re able to buy less than before with the same amount of money.

You might have experienced this recently when going to get groceries or going out to eat. You may be buying the same items, but paying more.

Inflation is a normal occurrence as prices go up over time. Think back to what it cost to get an ice cream cone as a kid, compared to now. But when inflation spikes higher than normal, it can cause financial strain on consumers and lead to economic uncertainty.

What’s the inflation rate?

Inflation, which reflects the increase in prices over a period of time, is expressed as a per cent. One of the top ways to evaluate the current inflation rate is through the Consumer Price Index (CPI).

The Consumer Price Index ^{footnote 11} tracks changes across sectors and looks at a “basket of goods and services.” These baskets include items such as shelter, food costs, transportation and more.

Inflation in 2022 has risen to levels consumers haven’t seen in decades, reaching 8.1% year-over-year as of June 2022 ^{footnote 22}

While that inflation rate is across goods and services, the rate can vary when you look closer at a specific sector.

For example, groceries increased 9.9% as of July 2022, the highest boost since 1981. Housing costs also jumped 7.4%, while gasoline costs in July were a staggering 35.6% more than the previous year, according to Statistics Canada. ^{footnote 33}

For context, The Bank of Canada strives to keep the inflation rate at around 2 per cent or less. ^{footnote 44}  So right now, the surge in prices is higher than normal due to various factors.

What’s causing inflation right now?

Inflation in 2022 can be attributed to various economic factors, including supply and demand, political events, and more.

The current inflation rate is a result of the pandemic and subsequent recovery, as well as the Russian invasion and war on Ukraine.⁴ These historical events have impacted supply chains, causing shortages, while demand and prices have increased. ^{footnote 55}

What is hyperinflation?

Right now, it can feel like inflation is out of control, with no signs of stopping soon. Even though the impact on Canadian consumers is palpable, the country isn’t experiencing hyperinflation.

Hyperinflation is a spike in inflation that rises quickly and when the inflation rate is higher than 50% over a period of a month, according to the World Economic Forum (WEF) ^{footnote 66}.

WEF explains that the cause of hyperinflation is typically due to a boost in the money supply and a shift in supply and demand that can impact prices. So while inflation may not feel good for your budget right now, it doesn’t have the same harmful impact as hyperinflation.

How inflation impacts your money

The effects of inflation can be widespread and you might already be feeling the pinch. The inflation meaning is more than just numbers on a piece of a paper or a news headline. It results in real higher prices for the same goods and services and may have an impact on your quality of life and standard of living.

The loss of purchasing power — meaning your money doesn’t extend as far as it used to — can be tough.

According to Statistics Canada, average hourly wages increased 5.2% in July 2022 ^{footnote 77} compared to the year prior. That means that many Canadians’ wages aren’t keeping up with the current inflation rate. So even if you’ve received a salary increase, it may not feel like it. Your money isn’t worth the same amount and can’t go as far.

Inflation takes a bite out of savings, but rates may go up

Having savings set aside for emergencies or to plan for the future and pay for a down payment or a vacation is always a good idea. Unfortunately, inflation can take a bite out of your overall savings. Given the increase in prices, the value of your savings isn’t worth as much given the decline in purchasing power.

But inflation may lead to higher interest rates for savers as well. According to the Bank of Canada: ^{footnote 88}

“If inflation is above the 2 per cent target, the Bank may raise the policy rate. This prompts banks to increase interest rates on their deposits, loans and mortgages. Higher interest rates encourage saving and discourage borrowing and, in turn, spending.”

To help limit the effects of inflation and benefit from potentially higher rates, consider saving more. That way your deposits are growing and working for you.

Inflation may increase rates on loans

Inflation may have an impact on any loans or lines of credit  you currently have or plan to take on. If you currently have fixed-rate loans, the good news is that your rates stay the same. You know what to expect. Your monthly payments may be the same and actually be worth less. In this case, that would work in your favor.

However, variable rate loans may see a spike in interest rates during a period of high inflation. Any increase in interest can mean paying more over the life of your loan.

Though rates may be higher on certain loans or lines of credit, consumers may need to borrow to close the gap between wages and increased prices due to inflation. Just be aware of how inflation may be impacting interest rates.

The bottom line

Inflation is a normal part of life and has an impact on your finances over time. When inflation is at somewhat normal levels, you may not even feel it. In some cases, you could benefit from inflation with higher wages or higher interest rates on savings accounts. However, the current inflation rate is much higher and is affecting Canadians’ purchasing power.

To help minimize the effects of inflation, revisit your spending, and adjust what you can while understanding that some things are simply out of your control. You’re not alone, everyone is paying more.

To help manage, open a savings account with a competitive interest rate or get assistance with a loan or line of credit.