Inflation affects everyone. It can be defined as the rate at which the price of goods and services increases and is typically measured on an annual basis. In this article, we will explore the effects of inflation on everyday consumers and what individuals can do to combat these effects.
The Erosion of Purchasing Power
As inflation rises, the prices of goods and services increase. Your money essentially is worth less over time as any given unit of currency can purchase fewer goods and services. As a result, without a corresponding increase in income, consumers may experience difficulties covering everyday expenses like groceries, utilities, rent, and more.
A related issue is stagnant wages and a difficult job market. The availability of high-paying jobs is limited, especially for those with limited education and resources. Even those who are making what have been historically considered middle-class incomes in Canada may struggle with inflation and the erosion of their purchasing power. Many Canadians are therefore relegated to living paycheque to paycheque. In the absence of a high income, it can be difficult to get through the month, let alone save and invest.
In addition, vulnerable groups may face greater difficulties paying for their expenses. Yet the effects of inflation and a high cost of living are felt throughout the economy.
What’s Causing Inflation?
Inflation arises due to a wide variety of factors, which depend on the specific economic context. Relevant factors may include the following:
- Supply chain disruptions, which push up prices
- Rising demand for goods and services, which may outstrip supply
- Excessive government spending in the absence of corresponding economic growth i.e. printing excess money
- Low interest rates, which encourage higher spending
This is a complicated subject with many different variables, and there is likely no singular factor that is responsible for inflationary tendencies in any given economy. Instead, a myriad of variables come together to create the economic reality we face in Canada and in many countries around the world.
What Can Be Done to Combat Inflation?
While the Bank of Canada periodically attempts to curb inflation by hiking the benchmark interest rate, thus disincentivizing spending and slowing the economy, these measures hit many Canadians hard. Particularly hard-hit are those with variable-rate mortgages or other variable-rate loans. This is because variable interest rates are vulnerable to sudden increases, making mortgage payments or other loan payments more expensive and potentially unaffordable. Hiking interest rates is a crude tool, but there are some additional measures that can be taken.
First, employers can make cost-of-living adjustments to their employees’ incomes. In Ontario, for instance, the Ontario Living Wage Network (OLWN) certifies employers who meet certain criteria as Living Wage Employers, which may make them more appealing to prospective employees. These employers are considered to pay their employees a living wage in their region as calculated by OLWN. Notably, the living wage, which entails paying for regular expenses and participating in the community, exceeds the minimum wage almost everywhere in Canada.
Second, businesses can strive to optimize their cost of production to avoid passing higher prices on to the consumer, diversify their supply chains to minimize the impact of supply chain disruptions, and avoid sudden and steep price increases that may alienate consumers.
In the long run, investing in new technologies that optimize productivity and efficiency, may help stabilize costs.
Governments can strive to enact smarter fiscal policies, such as scaling back spending when necessary, investing in supply chain improvements, encouraging labour force participation, and so on.
This is, of course, easier said than done and is only a brief and broad overview of potential steps. That is why competent leadership at the highest levels is a critical ingredient of managing the current levels of inflation and cost of living.
That being said, it is unlikely that inflation can be entirely avoided as the world economy always goes through fluctuations and is cyclical in nature.
Tips to Deal with Inflation and the Rising Cost of Living
While the current economic realities may seem daunting, it’s important to take a proactive approach to your finances. Here are five smart tips to combat the impact of inflation in your everyday life.
Tip #1: Reevaluate Your Budget
Look at your total monthly income and your fixed expenses. Consider whether there is any wiggle room in your variable expenses, such as going out to eat, unused subscriptions, and/or any other frivolous expenses. While some amount of pleasure spending is necessary in everyone’s life, you may want to reconsider some of your spending.
Once you’ve assessed your monthly cashflow and where you can cut your expenses, you may wish to set clear financial goals, such as saving for a specific purpose. You might want to save for a short-term expense like a vacation or paying off debt or a long-term goal like buying a home or retirement savings. Tailor your spending in accordance with your short-term and long-term objectives.
As your financial life evolves, continue to review your budget regularly and make adjustments as needed.
Tip #2: Increase Your Income
In the absence of a good income, it can be incredibly difficult to cover your expenses, especially given the high cost of living. Increasing your income can be a huge step toward greater financial freedom. This can be accomplished via several different avenues: retraining for a new career, earning a raise or a promotion at your current job, starting a side gig or side hustle, and/or creating passive income via things like investments, e-commerce, and even social media.
In the digital age, learning new skills has never been more accessible. You can attend an online bootcamp, take online courses, watch video tutorials, and do many of these things for a small fee or even for free! The Internet offers a smorgasbord of opportunities and potential skills to learn, provided you can dedicate some time and effort toward a new and exciting pursuit. For example, you can learn an in-demand and well-compensated skill like programming, as outlined in this article by the Huffington Post.
Tip #3: Pay Down Your Debt
Use either the snowball method or the avalanche method. The avalanche method has you start with your highest-interest debt, followed by lower-interest debt. The snowball method has you start with your smallest debt. Paying off your smallest debt may help motivate you on your debt repayment journey as you may see progress more quickly.
Paying down your debt may help reduce your debt-to-income ratio (DTI), potentially contributing to a higher credit standing, not to mention reducing your stress levels and allowing you to direct your income toward other expenses.
Tip #4: Invest
If you simply let your savings sit in your chequing account, their value will deteriorate over time due to inflation. Therefore, the best thing you can do is invest some of your money. For the average investor, index funds are likely the best bet. Invest in an index fund like the S&P 500 and allow compound interest to grow your savings and investments over time. Index funds typically offer fairly reliable growth over the long term, with some unavoidable short-term fluctuations but a general upward trend. For more information on the benefits of investing in index funds, refer to additional resources such as this.
It may be difficult for many Canadians to invest money due to a lack of savings as well as a lack of financial literacy. That’s why it’s important to build a savings habit and acquire financial literacy skills. Educating yourself on financial matters is a great first step.
Tip #5: Build an Emergency Fund
This may seem nearly impossible, especially on a low income. In fact, almost half (49%) of Canadians say they have no savings for an emergency. However, building an emergency fund is a critical step toward securing your financial future. Even a small amount of money set aside each week will accumulate over time. For example, $50 saved per week over the course of 20 weeks would equal $1,000 in savings, which already represents a solid start. The importance of an emergency fund cannot be overstated as noted on the Government of Canada website. You may face an unexpected situation like a job loss or car repairs, in which case, you would want to have funds available to cover the expenses without sacrificing necessities such as rent or utilities.
The Bottom Line
Everyone is feeling the effects of inflation and the high cost of living, not just in Canada but around the world. It is important to note that countries with a comparatively low cost of living by Canadian standards may also have low average incomes, so the purchasing power is proportionally lower. While inflation affects everyone, there are steps we can take to combat its effects on our financial life.
In the meantime, if you’re faced with unexpected expenses or a cash shortfall between paycheques, apply for an online personal loan via Crediteck. We don’t check your credit score or credit report during our simple and quick online application process.
As you strive to improve your financial quality of life, keep the five tips in this article firmly in mind.
