Everything You Need to Know About Canadian Inflation Rates & Hyperinflation

If you are like me, you have likely had a recent experience where you have gone shopping and experienced sticker shock. The price of something that you have gotten used to buying has jumped higher. A lot higher. This is a result of inflation. In this blog, we will take a look at everything you need to know about Canadian inflation rates and hyperinflation and how they will affect you.

What is Inflation?

The simplest way to think about inflation is that it is the rate at which prices increase over a period of time – or to think about it as the rate at which the purchasing power of your money decreases over time.

Typically, inflation is quoted as an annualized percentage measuring the change in the price of a basket of consumer goods and services. This is called the Consumer Price Index or CPI. In its simplest form, inflation means that everything gets more expensive. The value of a dollar goes down, so you need more of them to buy a Big Mac (which is why a Big Mac cost $0.88 in 1978 and $5.69 in 2021).

Is inflation good or bad? Since inflation erodes the purchasing power of your money, it’s understandable to think that it is bad. However, there exists evidence that suggests that a small amount of inflation is good for the economy as it encourages spending, investing and growth. This is why the Bank of Canada adjusts its policy to target 2% inflation over the long term.  Inflation is important because it impacts the real value of things and your money, the price of goods and services.

What Is hyperinflation?

Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. Hyperinflation is rapidly rising inflation, typically measuring more than 50% per month. Luckily for Canadians hyperinflation is a rare occurrence for developed economies such as ours. However, it has occurred many times throughout history in countries such as China, Germany, Zimbabwe, Hungary, and Argentina.

What Is the Current Inflation Rate and What Is Causing It?

In Canada, inflation is measured using the Consumer Price Index (CPI). The CPI rose 3.1% year-over-year from June 2020 to June 2021. You might be thinking that number seems very low as most of the prices you see, from real estate, to gas at the pumps, to meat at the grocery store seems like it has gone up a lot more than 3.1%.

However when you look at previous years 3.1% is the highest it’s been since 1992, and the year prior to the pandemic (2019-2020) the inflation rate was only 0.72% which means the inflation rate has gone up over 300% in a single year.

What is to blame for this rise in prices? Well, the simple answer is the Covid-19 Pandemic. The pandemic has caused:

  • disruption to the supply chains for most goods
  • disturbed employment levels
  • the federal government to inject a huge amount of money into the economy

These factors all lead to higher prices.

Not only has the Pandemic affected the supply side but it also affected the demand side. We’re generally seeing demand for stuff increase as people are looking to buy things and do things they couldn’t before, as most of the country at one point or another was in lock down. In other words, people are spending on what they couldn’t spend before often using the funds the federal government has supplied.

When supply chains are disrupted and demand is at an all time high – it all adds up to higher prices. A perfect example of this is the used car prices, which were up over 40% year-over-year in June 2021.  Unfortunately, imbalances in supply and demand don’t correct overnight, it takes time but hopefully in the end it will correct itself.

Should I Be Worried?

As noted earlier historical examples of hyperinflation in developed countries, such as Canada, are rare. Although relying on history for the future is not an ideal answer. It’s best to remember that the Bank of Canada and the Federal Government had numerous tools and policies at their disposal to ensure that we never have to worry about hyperinflation.

Adjusting your spending habits accordingly can help ease the effects of inflation. In this short podcast Derek Chase shares his advice about budgeting in times of high inflation.

How Does Inflation Affect Me?

When inflation is high, you can expect to feel it in your wallet. Whether it’s a few extra dollars to fill up your tank or to put food in your shopping cart at the grocery store, your money simply won’t go as far.

If you are trying to pay household debt, rising inflation can make this more difficult. Higher inflation means you have less money every month to service your debt as you will be paying more out of your pocket for your day to day expenses.  When the price of everything increases, your purchasing power decreases. If you need to start spending more money on groceries, gas, and life’s necessities, then you have less money left over for debt repayment.

In addition, rising inflation can also result in higher interest rates. If you are in a situation where you have to borrow more money and Canadian inflation rates are on the rise, then you will have to pay more in interest.  Higher interest rates mean you are paying less on your principal and more towards interest.

We Can Help

If you are feeling the pinch in your budget and noticing that you simply don’t have enough to meet your day-to-day expenses as well as make your debt payment obligations, contact Chase & Associates. One of our Licensed Insolvency Trustees (LIT) will sit down with you and review the options available to you to help you manage your debts. Remember it’s a free, no-hassle consultation that will guide you to a debt-free future.

Len Hiquebran, CPA, CA, LIT

After completing my articling at a local accounting firm, I spent some time working in industry as a controller of a logging company. Subsequently, I joined Derek L. Chase & Associates Ltd. in 2017 and began working in the insolvency field. In June 2020 I completed my studies and was granted a license by the Federal Government to be a Licensed Insolvency Trustee.