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Inflation and how it affects Canadians


Inflation and what it means for Canadians: 


January 16, 2024


The new numbers just came out today for December. Canada’s annual inflation rate rose in December to 3.4% from 3.1% in November. This is down from a 40-year high of 6.8% in 2022. Rising rates have been able to reduce the inflation rate but now the higher mortgage costs are one of the biggest causes for inflation to climb again. Canada’s Central bank is trying to target 2%.  


Mortgage interest costs were the largest contributor to higher inflation, going up 28.6% compared with the previous December 2022 as interest rate hikes saw borrowing costs balloon. Increases in the cost of rent, air transport, fuel, and passenger vehicles contributed to the higher December figures. 


Canadians are paying 7.7% more for rent in December 2023 than in December 2022. Groceries have risen 5.9% in the past 12 months. A typical family would pay $1065 more for food per person in 2023. The forecast shows 2024 will see changes of 2.5-4.5% for groceries.


What is Inflation: 


Inflation refers to the percentage increase in the general price level of goods and services in an economy over time. When the inflation rate is positive, it means that, on average, prices are rising. For Canadians, the impact of inflation can be both positive and negative, depending on various factors. Here are some key points to consider: 


  • Purchasing Power: Inflation erodes the purchasing power of money. If prices are rising, each dollar buys fewer goods and services. This can affect the standard of living for Canadians, especially if their incomes do not keep pace with inflation. 

  • Cost of Living: A moderate and predictable level of inflation is generally considered normal in a growing economy. However, if inflation is high and unexpected, it can lead to an increase in the cost of living. Essential goods and services, such as food, housing, and transportation, may become more expensive. 

  • Interest Rates: Central banks, such as the Bank of Canada, may use monetary policy tools, including interest rates, to control inflation. If inflation is too high, central banks might raise interest rates to cool down economic activity. Higher interest rates can affect borrowing costs for Canadians, including those with mortgages or other loans. 

  • Savings and Investments: Inflation can impact the real return on savings and investments. If the rate of inflation is higher than the return on investments, the purchasing power of savings may decrease. Investors need to consider the impact of inflation when making investment decisions. 

  • Wage Growth: In an environment with rising inflation, wages need to keep pace with the increase in the cost of living. If wages do not rise at a similar rate, households may experience a decline in real income. 

  • Government Policies: Government policies, such as fiscal measures and social programs, may be influenced by the inflation rate. Governments often aim to strike a balance between supporting economic growth and keeping inflation in check. 

Individuals, businesses, and policymakers must monitor inflation trends and adjust their strategies accordingly. If inflation is well-managed and remains within a target range, it can contribute to a healthy, growing economy. However, excessive or unpredictable inflation can pose challenges for individuals and the overall economic stability of a country. 


How does the inflation rate affect the Bank of Canada and its rate decision next week: 


An inflation rate of 3.9% can have several implications for the Bank of Canada and its monetary policy decisions. Here are some ways it may affect the central bank:


  • Interest Rates: One of the primary tools the Bank of Canada uses to control inflation is the benchmark interest rate. If inflation is significantly above the target range (which is typically around 2% in many developed economies, including Canada), the central bank might consider raising interest rates. Higher interest rates can help cool down economic activity, reduce spending, and bring inflation back to the target range. 

  • Monetary Policy Adjustment: In response to higher inflation, the Bank of Canada may adjust its monetary policy stance. This could involve tightening monetary policy by raising interest rates or using other tools to reduce the money supply. The aim would be to curb inflationary pressures. 

  • Inflation Targeting: The Bank of Canada has an inflation-targeting framework, aiming to keep inflation within a specific range. If inflation consistently exceeds this range, the bank may need to bring it back under control. On the other hand, if inflation is below the target, the bank might consider more accommodative policies to stimulate economic activity. 

  • Exchange Rates: Inflation differentials between countries can influence exchange rates. If Canada's inflation rate is significantly higher than that of its trading partners, it may affect the value of the Canadian dollar. Central banks often consider exchange rate implications when making monetary policy decisions. 

  • Economic Growth: Higher inflation can be indicative of robust economic activity, but it may also signal overheating. The Bank of Canada aims to balance economic growth with price stability. If inflation is driven by excessive demand, the central bank might take steps to prevent an unsustainable boom that could lead to a subsequent bust. 

  • Communication with the Public: The Bank of Canada regularly communicates its monetary policy decisions and outlook to the public. In a situation with elevated inflation, the bank may provide clear guidance on its intentions and the rationale behind its policy actions. This transparency helps businesses and individuals make informed decisions. 

It's important to note that central banks consider various economic indicators, not just inflation, when formulating monetary policy. The goal is to achieve a balance that supports sustainable economic growth while maintaining price stability. The specific actions taken by the Bank of Canada will depend on the overall economic conditions, including factors such as employment, GDP growth, and inflation expectations.


We are all hoping to see a hold to future increases, but we must wait and see!!!  House sales saw a bump in December so if you want to buy, now is best as the spring may see more competition and price increases again.  Call to book a review!

Tracy Bennett at 3:11 PM
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Tracy Bennett
Name: Tracy Bennett
Posts: 35
Last Post: April 10, 2024

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