Canadian Inflation: The Ultimate Guide To Survive Rising Prices in 2022

A recent poll from the Angus Reid Institute shows that 57 percent of Canadians reported having a difficult time feeding their families recently. That’s an increase from 36 percent in 2019, all due to Canadian inflation. So what is inflation, and what can you do to stop it from wreaking havoc in your life?

There’s a reason why “inflation” sounds like such a scary word. In fact, it sounds a lot like “inflammation”, which could easily be a metaphor for how inflation works. Before we get into details about inflation though, let’s get your wheels spinning with a little visual.

Inflammation is a reaction to something bad. If you’ve experienced a bee sting, you watched the skin around the site grow red and puffy. That is inflammation. We know it will go away. Unfortunately, the same does not go for inflation. Like any other financial concept, inflation can decrease but not for long periods of time. It might just be a few years.

Another sad reality of inflation is that decreasing prices on everything from gasoline to groceries typically come with an economic recession. Canada seems to have clawed its way out of what economists have called “the most abnormal recession ever” during the pandemic. However, Canadian inflation is at an all-time high.

The cost of living

Of course, like every other financial concept, the rate of change of consumer prices had to have its own term in the book of money: inflation. The Consumer Price Index (CPI) is the most common system to gauge inflation. It is used by the Bank of Canada and Statistics Canada to measure the cost of living.

How do we measure the cost of living? By looking at the prices of goods and services as well as basic human necessities such as food, housing, transportation, energy, furniture, clothing, recreation, and other items. As you may have noticed, the cost of all these things has gone up in recent months.

How does inflation affect the economy?

First off, let’s establish why prices go up and down in the first place. According to the Bank of Canada, prices tend to go up when the demand for goods and services is more than the economy supplies. The opposite happens when the economy supplies more goods and services than people want or need.

Essentially, a balance between society’s demand for things and economic production is necessary. An imbalance leads to far-reaching economic effects. Picture the beginning of the pandemic or the Great Recession of 2008.

What is good about inflation?

Inflation is not all bad. A low and stable inflation rate helps money keep its value. Stability gives consumers the power to plan for future expenses and budget their money. A modest, steady inflation rate basically makes it easier for everyone to evaluate long-term financial growth.

On the flipside, a high inflation rate can change how we shop, budget, invest and travel in a relatively short amount of time. High inflation significantly reduces consumer purchasing power. That means that our money loses value. The number on the dollar bill doesn’t change, but what that dollar buys you does.

What do the experts think?

As for Canadian inflation in 2022 and beyond, Patrick O’Toole, the vice-president of global fixed income with CIBC Asset Management, explained the finance world’s outlook in an interview with Advisor’s Edge: “There’s been this tug of war between those who think it’s transitory, as the central banks have been talking about, and those who think it’s more persistent.” When it comes down to it though, numerous experts believe that the pandemic mismatch between supply and demand could have lasting impacts on our economy.

What’s happening with Canadian inflation now?

According to the Canadian Union of Public Employees (CUPE), there are three main causes of the higher-than-normal Canadian inflation:

• Global supply chain disruptions
• A temporary increase in pent-up demand for items that weren’t available during the pandemic
• Widespread droughts affecting agriculture

One day after the CUPE published its article on inflation, Deputy Bank of Canada Governor Toni Gravelle outlined that the bank’s top two concerns were supply shortages and the elevated rate of inflation.

What is the inflation rate now?

Blink and it will change. A report stated that the Bank of Canada aims to keep inflation at the 2 percent mid-point of an inflation-control target range of 1 to 3 percent. At the time, Canadian inflation sat at 4.7 per cent. Today, it has risen to 5.1 per cent.

Obviously, the current inflation rate is considerably higher than the top of the bank’s inflation-control target range. Shockingly, inflation is the highest it’s been since 1991. And while we’re experiencing the highest inflation rate in 31 years, the U.S. is in an even worse place. Our neighbours to the south have an inflation rate of 7.5 percent, the highest inflation rate in 40 years. At the same time, financial forecasters who had initially considered supply constraints as temporary kinks in Canada’s recovery from the pandemic are now growing more concerned about backlogs, which may take a long time to clear.

How are you feeling, Canada?

If you were wondering how Canadians really feel about all of this, a recent Nanos poll revealed that inflation and cost of living were listed as the top source of anxiety. In addition, 87 per cent of Canadians are more likely to say they’re worried about higher prices for everyday goods rather than higher interest rates.

Speaking of higher prices, you may have seen your weekly grocery bill soar in cost. The cost of a food order is rising sharply. Things like like cooking oil are up 41.4 percent increase and canned tomato prices have increased by 15.5 percent hike.

Do’s and don’ts when it comes to Canadian inflation

With the cost of living on the rise, it’s more and more common that people are pouring time and research into the best ways to maximize their money. Headlines that read Does It Even Make Sense to Own Bonds? continue to roll across our screens. We are here to set the record straight.

In preparation for rising inflation or when inflation is high, there are certain things that you’ll want to do with your money. For example, some experts recommend channelling money into high-yield investment alternatives instead of sticking to less risky investment vehicles. Are there any less-risky investment options? You can always consider bonds.

What about bonds?

A bond is a financial instrument that enables you to lend money to a company in exchange for regular interest and a promise of repayment. It is a means used by companies or governments to finance their projects. You are lending money to the bond issuer. You are not an investor but a bondholder. The company has to pay you before they pay any dividend to an investor.

Bonds offer more stable returns than stocks. We’re guessing that at this point in the pandemic, “stable” is a word you like to hear. Stable means that bonds are generally less risky. They actually have an opposite correlation to interest rates. The value of one rises when the value of the other decreases.

Therefore, you can make money from bonds in two ways:

1. By earning interest
2. By selling the bond at a higher price than the purchase price, just like a stock

So, why should you steer away from bonds? Going back to vice-president of global fixed income with CIBC Asset Management, Patrick O’Toole, inflation is actually going to be falling closer to the 2% target that central banks have some time in late 2022. However, O’Toole said there is also reason to be concerned over the possibility of central banks aggressively raising rates as well. As a result, the economy may slow faster than some think, while bond yields should move up.

Rising interest rates are good for bonds. They are not very good for everyone’s mortgage. Truthfully, they are not good for people with low credit scores either, since they don’t necessarily get the best interest rates to begin with.

What investments are better for inflation?

O’Toole recommended that investors look away from average Government of Canada bonds. He also suggested moving away from investment-grade corporate bonds. Instead, he advised purchasing products that include high-yield bonds.

These days, financial advisors and accountants are also questioning clients about money they have sitting in the bank or in a registered retirement savings plan (RRSP). For low-income earners planning for retirement, there’s been a long debate over whether or not funneling money into an RRSP or a Tax-Free Savings Account (TFSA) is a better choice. The bottom line is this: your savings need to grow at a higher rate than Canadian inflation.

Inflation in Canada and investment products

When you deposit money in a bank account and interest rates are lower than inflation, your money is actually worth less in the future than it is right now. The general consensus is that you need to invest a portion of your money in investments that can generate a higher income for you. Examples of these investment vehicles can include stocks, index funds, or equity exchange-traded funds (ETFs). Both stocks and real estate have become popular investment vehicles, especially for millennial Canadians that can afford to purchase one, the other, or both.

Inflation in Canada and real estate

Of course, getting into your first house is hard. Real estate is an alternative investment vehicle that’s become harder to buy in recent years. Mortgage rates have been low for a while but the housing market has shifted again recently.

Stop me if you’ve heard this: the housing market has exploded and buying a home is more expensive than ever. Now there’s an even greater disparity between the homes available on the market and the lack of affordable housing that people need. It was recently observed that in September 2000 it cost an average of $351,575 in today’s dollars to buy a home in the Greater Toronto Area. In 2022, you’re looking at just shy of $800,000. When you factor in inflation, that’s an increase of almost 80 percent. And although the value of a house can appreciate, it’s been shown time and time again that stocks can outperform investments in real estate, especially due to the shifts in the market.

What about stocks, funds, and crypto?

Now more than ever, stocks are an enticing option to people young and old. Like real estate investments, you can buy and sell stocks five-days-a-week. Exchange-traded funds are available too. Cryptocurrency exchanges are open all day, everyday. That said, the barrier to entry in the housing market is much steeper than these other investment options.

Overall, there are many pros and cons to investing in different market-traded investments. Of course, positive returns are never guaranteed. When people make money, they want to spend money, which fuels consumer demand. In turn, companies will make money by satiating that demand and the more their revenues grow, the larger the return on your investment.

How to prepare for Canadian inflation now

It would be unfair to you, dear reader, to end this guide to surviving rising prices without giving some tangible tips to put into practice. We won’t be the ones to tell you to diversify your investment portfolio and go on our merry way. Instead, we’ll give you five ways to prepare for Canadian inflation that you can put into action now.

Also, we hate to sound like a broken record, but preparation is everything. In the world of finance, the good ol’ saying “it’s better to start now than later” gets thrown around just as much as “it’s never too late to start”. Both are cliché but accurate. Keeping that in mind, let’s take a look at how you can put yourself in a better financial situation during this time of increasing costs.

Reduce everyday expenses by evaluating your consumption

To do so effectively, start by reviewing the increased cost of the products and energy you use the most. This list of items will most likely include food, clothes, transportation, water, and gasoline. It’s easiest to review at least three month’s worth of purchases or bills for each of these items to really get a feel for just how much you’re spending, month-over-month.

This year, the average household is expected to pay an extra $29 for water annually, bringing the average bill to $979 from $951. Gas prices have also shot up to record heights: Newfoundland, British Columbia and Quebec are currently grappling with the highest prices across Canada with prices in Vancouver reaching over $1.80 per litre. Once you know just how much money you’re shelling out on consumption, it makes it easier to reassess your budget.

Reassess your budget

If we’re all being honest with ourselves, is reworking a budget fun to do? Not exactly, unless you’re prioritizing a new goal or close to hitting one. If you’re not looking forward to reassessing your budget due to Canadian inflation, it’s most likely because you’re unexcited about cutting your budget for something in particular.

Thankfully, sorting out your budget is made simple with free budgeting apps like Hardbacon. Hardbacon is designed specifically for mobile and you can connect and manage all of your accounts through its easy-to-use interface. It takes budgeting to the next level because it also tracks your investments and helps you plan your goals. Goals like getting a bigger emergency fund or saving for a vacation to help you forget about inflation.

Buy in advance

On the topics of budgeting and spending, it might be a good idea to buy something you want or need in advance. Remember: if it’s not in the budget, don’t buy it. But if you’ve got the cash, get ahead of the supply shortage and look for the best deal you can find.

In order to get the best deal on items you want or need, you can plan to buy before you need them as well. This precautionary step allows you to avoid impulse buys when you’re in desperate need for something. You can coupon it, share the cost with friends, or use a cash back app.

For more expensive items that take a bigger chunk out of your budget, refer to resources that inform you of the best times to buy. Take for example, TVs. You want to hit the sweet spot of the market between fall and early winter, when holiday sales begin and the release of new models in January comes around. You can also buy discounted holiday items this year and use them next year. Yes, buy those Christmas lights the day after New Years. Want a barbecue? Buy it at the end of summer and use it next year.

Negotiate a raise or earn more money with a side hustle

Another grim factor of Canadian inflation is that the more things cost, the more money we have to try and make. That said, if inflation remains the same or goes up even higher, you might actually see a decrease in pay. Don’t freak out. This doesn’t mean your job will pay you less. As we mentioned earlier in this article, your money does not hold the same value the higher rates get. Thankfully, there’s a solution to this problem: earning a salary increase.

Nowadays, experts recommend asking for a cost-of-living salary increase. This should be at least 6 to 10 per cent more than your current income for those who do not work in a private sector. This will allow you to stay even or come out a little ahead at the end of the year. You can also earn more money with a side hustle. People are making a lot of money on sites like Upwork and Fiverr in their spare time.

Make room in your budget for investing

Once you’ve got everything else under control, it goes without saying at this point: make room in your budget to invest. You can also carve out more of your budget to invest or dedicate more of your budget to diversifying your investment portfolio. In a time when everything else seems to threaten the growth of your money, investing it in emerging markets is just another way to get ahead.