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How to defend against inflation.


If you’ve been to the grocery store recently, you may have noticed a considerable rise in prices. All of a sudden, the cost of bread, milk, eggs, meat and your overall weekly food bill has gone up. And it’s not just food; prices have increased across the board. Filling up at the gas station, buying holiday presents, eating at a restaurant, even your car insurance — everything costs a little bit more nowadays. It’s called inflation and it’s currently at the highest level it’s been in two decades.

But what is inflation? Is it good or bad? Why does it happen? And perhaps most importantly, how can you protect your money from the effects of inflation? This article will cover all of that and more.

What is inflation?

The simplest way to explain inflation is the rate at which prices increase over a period of time. Another way to put it is the decline in purchasing power of a given currency. In other words, your hard-earned dollars don’t go quite as far as they used to, so you need to spend more to purchase the same goods and services. This rise in prices (or decline in currency value) is usually expressed as a percentage measuring the change in the annual prices of a basket of consumer goods in the Consumer Price Index (CPI).

Is inflation good or bad?

It sure sounds bad, doesn’t it? A rise in prices can be a difficult to deal with—especially if you’re living on a fixed income. However, most economists agree that a moderate level of inflation is actually good because it stimulates the economy, encouraging spending, investing and growth. This is why the Bank of Canada aims for a 2% inflation rate per year. That’s considered the sweet spot. But if prices rise too fast (hyper-inflation) or decrease over time (deflation), it can be sign of economic turmoil.

What causes inflation?

There are many factors that can impact inflation, but the supply of money is usually at the root of it. In broad terms, increasing the supply of money, usually by the Bank of Canada printing money, decreases its value. It’s simple supply and demand—the more of something there is, the less valuable it is. It’s a complex ecosystem, but this can have several effects on the economy.

The first, called the Demand-Pull Effect, is when demand for goods and services exceeds production capacity. For example, there was recently a chip shortage which caused a slowdown in vehicle production, resulting in higher prices due to a shortage of vehicle supply.

Another is the Cost-Push Effect when rising production costs cause prices to go up. An example of this can be seen in the restaurant industry, where the costs of ingredients has risen causing them to subsequently raise their food prices. 

And, finally, there’s what’s called Built-In Inflation. It’s when wages are increased to keep pace with the new higher cost of living. This, in turn, results in higher production costs and, ultimately, higher prices. 

How do I protect my money?

By now, you should understand the basics of inflation. The next step is to figure out how to deal with it. We know the value of our money is eroding in an inflationary market. So, how do we protect it? The key is to avoid cash and get your money into assets or investments. Here are a few to consider:

  1. Real Estate – During an inflationary period, the cash decreases in value while assets increase, and this includes real estate. If you’re considering buying a home or investment property, now might be a good time. In addition, mortgage rates are relatively low so you can lock-in to reduce the cost of borrowing. To explore your options, it’s best to speak with a mortgage expert.
  2. Renovations – If you already own a home and aren’t planning on moving anytime soon, home improvements can be a sound investment. They increase the value of your home, which is an asset that typically increases in value during an inflationary market. Plus, you can enjoy the benefit of the renovations yourself. If you need help financing your home improvements, you can consider a loan or line of credit.
  3. Equities - While consumers get little benefit from inflation, investors can experience a boost in their assets. Stocks can often (but not always!) increase in value during a period of inflation. However, there is more risk involved with stocks, so be sure to diversify. Mutual funds can be good option that provides instant diversification.
  4. Commodities – Commodities, like gold, oil and corn, are also considered physical assets. As the prices of physical goods go up due to inflation, theoretically these should also increase in value. Typically, commodities are for more advanced investors and should only be considered with the help of a professional investment advisor.
  5. GICs – Guaranteed Investment Certificates (GICs) can be another way to hedge against to effects of inflation. Your principal investment is 100% guaranteed so there’s no risk involved, and your return is predictable. Rather than an asset that appreciates in value, you’d receive a return which can offset the effects of inflation. Explore GIC rates, terms and options here.

Whether you have $1 or $1 million, inflation affects everyone, so it’s important to have a strategy to help you preserve your hard-earned money. Hopefully, you’ve found some useful tips here. If you have any questions, your best bet is to speak with a professional wealth advisor who can help you make a plan tailored to your individual circumstances. Best of luck!