What is inflation?
Simply put, when inflation goes up, so does the cost of living. In 2022, inflation* hit a 40-year peak, the highest it’s been since 1982. (Well, actually it was the Consumer Price Index, which is a well-known indicator of inflation.*)
And when inflation goes up, the value of your money goes down.
Here’s what that means. Let’s say you have $10K hidden away. Maybe it’s under your mattress, maybe you keep it in your shoe. Over time, that money will lose value because over time that $10K won’t buy as much as it does today.
Think of it like this: if you budget $200 for groceries each week right now, you know that $10K can buy your groceries for one year (well, almost). But if the cost of your groceries goes up 3% every year, in 10 years you’d need to budget almost $270 each week. That means your $10K would buy you only 37 weeks of groceries. Same amount, but it doesn’t go as far. (We’re over simplifying inflation, but you get the idea.)
Inflation in 2022
The Consumer Price Index in Canada, the most well-known indicator of inflation
went up
6.8%
The highest increase in
40 yrs
The largest since
1982
Statistics Canada says this jump was largely due to COVID-19-related supply chain issues, among other factors. But to put it into perspective, inflation has averaged about 2% a year over the last 20 years.
Statistics Canada, Consumer Price Index: Annual review, 2022
When is inflation a risk to you?
Well, inflation can affect your investments. It’s a good thing to consider when planning your investment or retirement savings strategy. (Retirement income is typically fixed, meaning no cost-of-living raises to account for inflation.)
Using a diversified portfolio can help you combat the effects of inflation. Having a mix of assets – like mutual funds, stocks, fixed income, and commodities – can help ensure that you’ll have some expected to outpace inflation, and therefore not lose value over time (like we explained above).
What can you do?
Take a breath. Inflation is no fun, but there are a few things you can do to help you prepare for it:
- Make a budget. We know, it’s your parents’ advice, but it’s still good. Having a budget helps track spending, but it also shows you your habits, not to mention where you might be able find more money to set aside.
- Have a plan. Inflation might be unavoidable, but you can decide how you tackle it. Build a strategy that helps you tackle your financial future, and that accounts for the risk of inflation.
- Diversify your investments. Use a range of options to help stay ahead of inflation.
- Stick to your plan. A plan only works if you follow it. Check in on your strategy regularly you’re your needs change, change your plan to keep pace.
Remember, you don’t have to go it alone. If you want help building a strategy to make your finances inflation-proof, reach out to a Prospr advisor. Have other questions? Reach out too. We’re here to help!
* Statistics Canada, Consumer Price Index: Annual review, 2022.
