Canadians are frustrated with higher prices and questioning -“How long will inflation last and how high will prices go?”
The answer, no one really knows. But here is what we do know, the Bank of Canada has repeatedly telegraphed that interest rates will continue to climb, with the latest outlook for rates to hit 3.25% by the end of 2022. Rate hikes are designed to slow down borrowing, reducing the demand for goods, and increasing supply, with the ultimate end goal to lower costs for the consumer.
The effectiveness of this strategy can be dependent on how Canadians respond to inflation and the adjustments they make to their purchasing behaviours.
Those who believe inflation won’t last forever will likely make some short-term behavioural changes like shutting down discretionary spending, postponing a big purchase, finding cheaper alternatives for household products, driving less, all to save money.
Then, there are those consumers who believe that inflation will be long lasting. They fear that if they do not buy today, prices will continue to climb tomorrow. This drives up demand, causing the supply to be further limited and in the end, prices continue to climb. I caution that this reaction is not sustainable.
The strategy currently being executed by the Bank of Canada appears to be based on the belief that most Canadians will appreciate that higher rates will lead to price stability, avoid a devastating recession, and ultimately in the long run improve consumers purchasing power. However, this is going to take time.
Here are 5 strategies to help you get through the transition:
1) Reassess your spending: Now is the time to be incredibly vigilant with your finances. Take the time to understand how much money you have coming in, assess and understand your fixed costs and most importantly evaluate your discretionary spending. Be brutally honest with what is a ‘need’ and what is a ‘want’.
2) Time to lock in your mortgage: Variable rate mortgages have been rising in tandem with higher rates, and many Canadians are feeling the impact of this. Although variable rate mortgages might still be slightly lower than fixed rates, now is still a good time to consider locking in.
3) Take the time to source out deals: Even in high inflation environments, sales are going to happen. Consider exploring the second-hand market, search for sales and discount codes, shop your own closet, or redeem those loyalty reward points you might have been saving.
4) Hold back on that dream vacation: After being in lockdown, Canadians are eager to pack their bags and explore. However, the financial barriers to travel are overwhelming right now, higher gas prices, airport challenges, and as the tourism industry continues to recover you will quickly find your travel dollars will not go as far as they once did. Staycations are becoming more practical, more affordable, and back in vogue.
5) Put more money in your pocket: Your paycheck is not going as far as it once was. Explore the possibility of working more hours, picking up a side hustle, taking some of the equity out of your home, or consider selling your used goods online. Look for ways to reduce your taxes, for example, income splitting, or possible eligibility for credits and deductions, cut back on utility costs, and make sure your household isn’t duplicating health or dental benefit costs.
I’m in the camp that inflation won’t last forever, but I also believe we need to confront today’s reality. Accept that higher prices will not disappear overnight so until we see a meaningful move lower in prices, now is the time to control what you can and know that a few small changes really can make a big difference to improve your household’s bottom line.