How to Protect Yourself From Inflation

Woman investing to protect from inflation

How to Protect Yourself from Inflation in 2022

Findings from PolicyMe's Canadians & Money 2021-22 Survey

Canadians are feeling the strain on their pocketbooks with inflation rates hitting a 30-year high of 4.8%. Between rising prices at the pumps, soaring food costs, and the worst housing affordability in decades, it's no wonder that a recent survey from PolicyMe reports 70% of Canadians saying that Canada is becoming unaffordable.

There are no signs of inflation dropping anytime soon, either. RBC projects that inflation will remain above pre-pandemic levels until 2023. Despite a 2.7% wage increase expected in 2022, the purchasing power of Canadians will continue to shrink under the pressure of rising inflation. Fortunately, there are ways to fine-tune your finances to navigate the climbing cost of living.

In this article, we will explain what inflation is, how it works, and what you should be doing with your money right now to protect your financial future. The Canadian finance statistics mentioned in this article are from a nationally representative study conducted by PolicyMe in December 2021. You can read the full (and impressively thorough) PolicyMe study online.

Table of Contents

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PolicyMe is a digtial insurance company in Canada that offers Term Life Insurance. More than 50,000 people trust PolicyMe and it has a rating of 4.8/5 on reviews.io

What is Inflation?

In a nutshell, inflation is an increase in price coupled with a decrease in the value of money. Everything you spend money on — be it rent, a haircut, or a chocolate bar — can all be combined to calculate what's known as the "cost of living". As the cost of living increases (a number reflected in the Consumer Price Index or CPI), the dollar that used to buy two chocolate bars can now barely buy one. That's inflation.

Inflation can impact almost any product or service, including housing, food, medical care, utilities, and automobiles. Once inflation becomes prevalent throughout an economy, the expectation for rising prices becomes a growing concern for consumers. So, it's not surprising that struggling with the cost of living is the most important financial-social issue for 50% of Canadians.

Families dealing with high inflation rates

Inflation is hitting families hard

Families with children are especially affected by the rising inflation rate. Food prices have increased by 4%, placing grocery bills at the top of the list of most expensive child-related expenses for 47% of Canadians. Covering the cost of childcare is another major concern for 30% of surveyed parents.

Housing is becoming unaffordable

Housing prices continue to skyrocket, putting homeownership further out of reach for middle-class and lower-income families. According to the Canadian Real Estate Association (CREA), the average selling price is now $720,850. That's a 17.7% year-over-year increase from December 2020.

PolicyMe reports 63% of current homeowners are concerned about the impact of rising interest rates on their mortgage payments. While 86% of Canadians face barriers to buying a house. Considering the average household income in Canada is $62,900 (Statistics Canada, 2019), saving for a down payment is one of the biggest obstacles to homeownership. If the average selling price is $720,850:

  • A 20% down payment would be $144,170
  • A 10% down payment would be $72,850

If inflation stopped increasing today, it would still take over seven years to save enough to make a 10% down payment on a household income of $62,900 ($47,791 after tax in Ontario:), with a monthly mortgage payment of $3,161.65.

PolicyMe Survey Home Ownership

How Does Inflation Work?

When inflation drives prices up, your dollars don't go as far as they used to. Inflation rates are represented as percentages that can be used to get a sense of how quickly prices are rising and how quickly your money is losing value. For example, if the inflation rate for a gallon of gas is 3% per year, then a gallon that costs $2.00 this year will cost $2.06 next year. The same is true for the money you save. Suppose you have $5,000 in a savings account earning 1% in annual interest while inflation rates are 2% per year. In this case, your money is losing value at the rate of 1% per year (1% minus 2%).

What is hyperinflation?

When inflation drives prices up, your dollars don't go as far as they used to. Inflation rates are represented as percentages that can be used to get a sense of how quickly prices are rising and how quickly your money is losing value. For example, if the inflation rate for a gallon of gas is 3% per year, then a gallon that costs $2.00 this year will cost $2.06 next year. The same is true for the money you save. Suppose you have $5,000 in a savings account earning 1% in annual interest while inflation rates are 2% per year. In this case, your money is losing value at the rate of 1% per year (1% minus 2%).

What Causes Inflation?

A variety of factors can cause inflation. Generally, there are two main causes of inflation: demand-pull and cost-push. Both increase prices, but they each work differently.

Demand-Pull

With demand-pull inflation, there's a surge in demand for a product or service, driving prices upward. As demand increases, the available supply decreases. When fewer items are available, consumers are willing to pay higher prices to buy them. This is what's happening in the housing market. Low interest rates and limited inventory (especially affordable housing) have driven Canadian housing prices to record highs. In fact, Canada currently has the lowest number of housing units per 1,000 residents of any G7 country. That's why 61% of Canadians who want to buy a house believe that there aren't enough affordable options available.

PolicyMe Survey Barriers to Home Ownership

Cost-Push

Cost-push inflation happens when there is a supply shortage, but demand remains the same. As a result, the added production costs increase the price of finished goods. We see this happening with food costs right now. Supply chain disruptions and labor shortages caused by the pandemic have increased food prices to the highest annual rate since early 2016. The rising cost of putting food on the table is reported to be the biggest strain on finances for 25% of Canadians.

Is Inflation Good or Bad?

Inflation can be good or bad, depending on which side you're on and how rapidly the change occurs. Some people see inflation as a sign of a struggling economy, while others see it as a sign of prosperity. Here, we cover the pros and cons of inflation.

Pros: The Good Stuff

Logo Investors will enjoy a boost in held assets in markets affected by inflation (e.g., rising energy prices)

LogoCompanies experiencing increased demand can charge a premium price for their goods or services

LogoLower interest rates on bank loans allow people to spend more and increase the money supply

Cons: The Not So Good Stuff

LogoPurchasing assets (like property or stocks) will require buyers to shell out more money.

LogoFunds sitting in a savings account will be less valuable.

LogoUnemployment rates can increase due to higher operating costs.

Generally speaking, too much or too little inflation is bad for the economy. Most economists advocate for a middle-ground between low and moderate inflation, around 2% per year.

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PolicyMe is a digtial insurance company in Canada that offers Term Life Insurance. More than 50,000 people trust PolicyMe and it has a rating of 4.8/5 on reviews.io

How to Prepare for Inflation

Death and taxes aren't the only guarantees in life. Inflation is another phenomenon that we can expect to encounter over time. Understanding how inflation impacts the economy and your finances can help you protect the value of your hard-earned money. Here are five ways to prepare for inflation rates in 2022.

Follow a Budget

Despite the stress and shock of a pandemic, the national average financial resilience score improved from 49.58 to 55.67 because Canadians were forced to change their spending habits and tighten their budgets. Following a budget or spending plan is one of the best ways to beat inflation. This will make it easy to track your spending habits and make sure you only spend what you earn. Be sure to include line items for things inflation might affect, like clothing, food, gas, and housing. Calculate your expenses every month and stick to the limits you set for each category.

Pay Down Debt

28% of Canadians say paying down debt is their top financial priority for 2022. Credit card debt is one of the leading causes of financial strain for Canadians. Focus on paying off any high-interest credit card debt. Try covering more than the minimum monthly payment, if you can. There are options to consolidate your debt into a lower interest rate card if you owe money to more than one source. Low-interest debt is worth taking longer to pay off if you want to contribute to a savings account. This way, you can lower debt payments and interest, allowing you to save more.

Also Read: How To Pay Off A Credit Card

Cut Unnecessary Expenses

You can try to outmaneuver inflation by cutting out unnecessary expenses. More than half of Canadians reduced their spending on restaurants and dining in 2021, and 48% spent less on takeout and delivery. Consider reviewing your monthly subscriptions for apps and streaming services as well. Most subscriptions have a relatively low monthly fee, but these add up. You can also get creative with your purchases by opting for less expensive store-brand foods and shopping at bulk stores.

Save More Money

Going into 2022, the majority of Canadians are saving 20% of their net income on average. You can jump on the bandwagon by using the 50:30:20 Rule: spend 50% of your income on needs, 30% on wants, and 20% on savings. A portion of your savings should be used to build an emergency fund. The Canadian government recommends saving three to six months of regular expenses or income. Having an emergency fund will help you avoid dipping into your long-term savings for school, a mortgage, or retirement. Ask your bank about high-interest savings accounts and how to automate payments to put your financial future on autopilot.

PolicyMe Survey Saving vs Spending

Start Investing

Put your money to work by investing in stocks, bonds, mutual funds, or exchange-traded funds (ETFs). Using RRSPs and TFSAs to deposit interest, dividends, and capital gains is particularly popular among young Canadians. Compared to a 37% nationwide total, 45% of people ages 18-34 made regular contributions to their RRSP/TFSA in 2021. Investing 10% of your pre-tax income is a good starting point. It may sound like a lot but think of it as an expense that builds compound interest. You would be shocked at how many middle-class families become millionaires by investing a few hundred dollars a month. Although, be wary of loading up on bonds. The low interest rate will typically produce a lower yield than other investment options.

Also Read: How To Start Investing In Your 20s

The Bottom Line

As the country begins returning to normal, rising inflation rates are a pesky reminder that we aren't on the other side just yet. Canada will continue to become more expensive in 2022, but everyone across the Great White North seems united in making their money work harder to counteract the growing cost of living.

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