How to Protect Yourself From Inflation

Inflation is rising faster than normal. In July, Statistics Canada reports the inflation rate jumped to 3.7 per cent. As the cost of everyday items, like gas, shelter and household goods rose sharply. This is the highest inflation has been in 10 years. For many Canadian families this increase in costs can have a major impact on their household bottom line. 

What does rising inflation mean for your pocketbook? 

Inflation is a number that represents the change in price as experienced by Canadian consumers. It measures price change by comparing the cost of a fixed basket of goods and services from one point of time to another. In most cases, year-over-year increases are around two per cent. Companies set salary targets the same way, increasing wages by the average rise in inflation.

When inflation rises faster than expected, people need to adjust their budgets to keep up with their financial obligations. 

If the cost of things we use every day is higher, we often have little choice but to pay more. This can mean families are forced to cut down on extras like restaurants and travel. But it also means less money goes into savings.  This can have a huge impact on Canadians pocket books with less being invested for their future. 

What does higher inflation mean for mortgage rates? 

Higher inflation can also affect your mortgage rates and your ability to borrow. That’s because one way to dampen inflation is for to raise the Bank of Canada interest rate. The central bank likes to keep inflation in a range of 1-3 per cent, ideally closer to two per cent. A Bank of Canada interest rate hike encourages consumer to spend less and save more, resulting in lower inflation. 

But this also means commercial banks will raise their prime rates making it more expensive for home owners to service their variable-rate loans.  A higher interest rate means more money is going towards interest payments and less towards the principal. The Bank has indicated it may start to raise rates in mid-2022, if the economic conditions are right. Their next announcement on October 27th, after the election, could see changes. 

Where is inflation hitting hardest? 

According to Statistics Canada, shelter prices are up sharply. The homeowners' replacement cost index, which is related to the price of new homes, rose 13.8 per cent year over year. That is the largest yearly increase since October 1987.

Other places Canadians are experiencing higher prices is durable goods and passenger vehicles. 

Buying a sofa is more as well, as upholstered furniture costs rose 13.4 per cent. Big ticket items like televisions also rose sharply year over year. Food costs are also rising faster than normal. 

Products untouched by inflation

Costs that are down year over year? If supply and demand tell us anything, we know what we did in the pandemic; clothing, footwear, alcoholic beverages, tobacco products, and recreational cannabis.

How to protect yourself from inflation

There are some easy ways you can protect yourself from inflation. One is to avoid buying items most impacted by inflationary pressure. Right now, that would mean driving less and maybe putting off a big-ticket purchase like furniture and electronics. 

But it also means making more mindful day-to-day decisions. Watch the unit price of items. If you can get it cheaper from another brand, save money that way. 

When it comes to groceries, go back to the basics of shopping with a list and meal planning. Don’t waste food.  This alone can save you hundreds a year. 

Also, if you haven’t had a pay increase, ask your boss for a salary increase. Don’t increase your costs after getting that bump in salary; instead, save more, invest, or pay down debt. Money sitting in a low-interest bank account could end up costing you money. If it’s not earning more than inflation, it’s worth less than when you first earned it. 

Best investments for inflation protection

During times of higher inflation, it’s better to invest in commodities and goods that consumers buy rather than parking your money in cash. Look into investing in industries and companies where prices are rising fastest. 

Invest in a programmable thermostat to save money on electricity. According to  Energy Star, 42 per cent of a home’s energy consumption is on heating and cooling. Energy Star estimates that, if used correctly, the new temperature control could lead to $180 in annual energy savings.

When possible, buy items in bulk to save on the unit cost. 

As well, look out for ‘Shrinkflation.’ This is when companies continue to charge the same but offer less product. It’s a marketing trick to dupe consumers into thinking they are getting the same amount of product. 

Finally, negotiate the lowest interest rate possible to save on your borrowing costs when shopping for debt.

The bottom line

Higher inflation is a perfect time to re-evaluate your day-to-day spending and decide if some items are still worth it, especially if they have gone up significantly in price. 

Try these 5-minute tasks to save more money.

• Get a better credit card to earn more cashback
• Compare insurance quotes to save hundreds every year
• Renegotiate your mortgage rate
• Switch bank accounts

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