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What Does Inflation Mean To You?


It’s often been said that inflation is the slow killer of wealth.  Recent headlines in the news have been talking about inflation, or the lack there of it, however the general public feels the pinch in their pockets as prices for food and gasoline have slowly increased.  This has made it much harder for people to have money left over for non-essential and luxury items.

Debunking The Myth

Most people would think that the Bank of Canada is turning a blind eye to the struggles of every day Canadians.  The central bankers keep preaching the need for low interest rates due to the lack of inflation and even the fear of deflation even though Canadians disagree.  The truth behind the Bank of Canada’s words are not that prices aren’t increasing, but they are disparaged by the fact that wages and jobs have not increased.

Most people think of inflation in terms of the prices of the things they buy, but if you read between the lines in the statements made by central bankers, what they are really trying to do is keep interest levels low so that companies hire more people and increase wages. If you’ve been experiencing a decrease in your pay or you’ve lost your job, then no doubt you should be agreeing with the Bank’s statement.  The real reason why we’re feeling the pinch is because our wages are stagnant.

FEMA_-_29783_-_Workers_unemployed_by_the_freeze_in_CaliforniaInflation arises from the simple economical factors of supply and demand.  When there is a greater demand for a particular resource, then prices for that resource will tend to rise.  The issue that central bankers in many countries face is that the amount of people looking for work far exceeds the number of jobs available.  This excess demand is actually driving wages lower, not higher, but with prices for goods staying the same or rising ever so slightly this is making it seem like inflation is running rampant.

Negative Savings

Low interest rates and a rising prices don’t make a good combination for those who are stashing away their cash in savings accounts.  With inflation running greater than 2%, the paltry 2% interest that banks pay on a high interest savings account is actually negative savings.  Once taxes are removed from interest income earned, the price of goods and services are far outstripping any benefit there is to having a GIC or a high interest savings account.  This is terrible for the conservative saver, and worse yet for those with a fixed income because their purchasing power is diminishing year over year.

This makes it even more important to diversify your savings into investment vehicles that will generate a return greater than inflation.  If you don’t beat inflation then any money saved is really dead money.

Asking For A Raise

If the company you work for doesn’t give you a raise, you can treat that as actually getting a pay cut.  If prices rise and your salary doesn’t rise to follow the rate of inflation, then your purchasing power has decreased.  To maintain the same standard of living, it’s important to request a raise at the minimum of level of inflation.  If your employer values you as an important employee then raises greater than the rate of inflation should be expected.

Some individuals are happy to get a couple of thousands of dollars for a raise and settle for it, but in actuality, the raise is actually a pay cut.  An important part of a job is not just how well you like it, but whether or not it can maintain the lifestyle that you want.  Don’t be shy to talk to your employer about your own financial plights.

Interest Rate Risk

Bank_of_Canada_Building_Ottawa_(1)Almost all central bank policies in the past 10 years have been tied to inflation.  This is why interest rates have remained so low for so long.  During the financial crisis, home prices in the United States decreased by a substantial amount, thus causing deflationary pressures.  This prompted the US Federal Reserve to move interest rates down to combat the decrease of prices.

Contrary, in inflationary times, the central banks will tend to raise interest rates to avoid prices from running up too fast.  This is where individuals need to be diligent of their finances.  With inflation starting to pick up, there is always a fear that interest rates will start to rise.  Be careful not to accumulate too much debt because as interest rates start to rise to combat inflation, the amount necessary to pay off these debts will become an increasing burden.  Debt can include anything from car loans, mortgages, student loans and even personal lines of credit.  Never fall prey to cheap money.  If it’s too cheap there must be a catch.

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  1. […] written before about how inflation can destroy wealth. Unfortunately, just saving is not enough to meet our future retirement needs. Money needs to grow […]

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