Inflation: What It Is and Why You Should Care
Did you know that the cost of living in Canada has been steadily on the rise for the last few years? In fact, according to a study recently released by Statistics Canada, the cost of consumer goods and services increased by 5.7% in 2022, marking the third consecutive year that prices have gone up. This is significantly higher than the rate of inflation in other developed countries; for comparison, prices only rose by 2.8% in Japan and 4.8% in France over the same period. What’s behind this sharp increase, and what can be done about it?
To answer these questions, we need to first understand what inflation actually is. In short, inflation is a measure of how much prices are rising overall across an economy. It’s calculated by taking a “basket” of goods and services representative of everyday purchases and tracking how their average price changes over time.
When inflation rises, it means that consumers are having to spend more money on basic necessities like food, shelter, and clothing; this can make it difficult for people to afford basic necessities as well as save for retirement or emergencies.
Why You Should Care About Inflation?
While inflation may seem like a dry and academic topic, it can have very real consequences for your everyday life. As prices increase, your purchasing power decreases; this means that the same amount of money will buy you less than it did in the past.
For example, if the cost of milk goes up by 10%, you’ll only be able to buy 9 liters of milk with the same $10 you could have previously used to purchase 10 liters. Inflation can also have an impact on your savings; if the rate of inflation is higher than the interest you’re earning on your savings, then your money is actually losing value over time.
There are a number of factors that can contribute to inflation, but the most important include:
The cost of raw materials and inputs: When the prices of things like oil and gas increase, it can lead to higher prices for finished goods as well. Imagine, for example, that the price of steel increases. To offset this cost, the company that makes cars may need to raise the price of their vehicles.
The level of economic activity: When an economy is doing well and there’s high demand for goods and services, businesses may raise prices to maximize profits. Additionally, when unemployment is low, workers have more bargaining power and can demand higher wages, which can also lead to inflation.
The level of government spending: Government spending can spur economic activity and create demand for goods and services, which can lead to inflation.
Final Thoughts
Inflation is a complex topic, but it’s important to have a basic understanding of what it is and how it can affect you. Keep an eye on the rate of inflation in your country and pay attention to how changes in the economy may be impacting the prices of goods and services. This way, you can be prepared for how inflation may affect your finances in the future.