If there is one word to describe the start of 2022, it is “inflation”. This is a phenomenon that we had not seen in Canada for more than 30 years and which is complicating the economic recovery that everyone has been waiting for. What we notice, however, is that not everyone is equally affected by galloping inflation.
Inflation, measured by the consumer price index (CPI), reached 6.8% last April, its highest level since 1991. The May figure should be out by Wednesday and all economists are hoping to see the trend to reverse, which would be reassuring for Canadian consumers.
We are so interested in inflation mainly because it is a phenomenon that has a significant impact on the lives of the vast majority of people. However, it is recognized that inflation is particularly difficult for some people. This is what we will examine here.
1. Inflation strongly affects people with low or fixed incomes
The category of people most affected by inflation is certainly people with lower incomes or fixed incomes (retirees on defined benefit annuities, for example).
For people with high incomes, it is always possible to cut some superfluous expenses in order to balance their budget. For example, you can cut restaurants, subscriptions (Netflix, Spotify, etc.), outings and travel. On the other hand, when our entire income is spent on essentials, it becomes heartbreaking to have to choose between groceries and electricity.
Another factor that comes into play for this category of people is the ability to negotiate a salary increase. For people in precarious or part-time jobs, it can be very difficult to negotiate a salary increase that will keep up with the CPI.
2. Canadians in debt will be hardest hit
The second category of people who will be hard hit by inflation are people with a high debt ratio. This is explained by the fact that in response to rising inflation, the Bank of Canada will gradually raise its prime rate, which will increase the interest paid on the debts. Both car loans, personal loans, lines of credit and even credit cards will become increasingly difficult to repay.
Already the prices of products and services will put pressure on their budget, the repayment of debts will also complicate the situation for these people.
3. People with variable rate mortgages
Those who have renewed their mortgage at a fixed rate in the last two years can breathe a little easier than those who are struggling with a variable rate that keeps climbing.
Take the example of a couple who has a mortgage of $300,000. At an interest rate of 3%, this corresponds to monthly payments of approximately $1,420. If the interest rate increases to 5%, the monthly payment rises to $1,745, an increase of $325. At a rate of 6%, that’s a $500 increase per month.
This is obviously a very difficult situation that will complicate the budget of many Canadians.
4. Young retirees
For people who have recently retired, their financial plan could get confusing. Not only do most financial models forecast inflation at 2% to predict the future cost of living, but they also forecast returns of around 5% on investments.
It can be said that both of these premises are completely wrong for the current year. Not only are prices rising at breakneck speed, but stock markets have crashed in recent months. The Canadian stock index “S&P/TSX” is down more than 10% and it’s even worse on the other side of the border where the “S&P 500” is showing a decline of about 25%.
For a retiree who sees his investments melt away at the same time as his expenses increase, the situation can cause its share of anxiety.
5. Tenants who need to move
Due to the housing crisis affecting Quebec, and in particular the Montreal region, we know that rents are rising sharply. Those who have lived at the same address for several years may have managed to keep rent affordable, but those who start apartment hunting often find themselves having to stretch their budget.
This situation undoubtedly explains the meteoric increase in lease assignments. This practice, which was the exception before, is becoming more and more common and allows tenants to help each other to keep rents affordable.
There are even groups on Facebook that specialize in this practice:
- Cession de Bail et Sous-location Montréal (39,000 members)
- J’te cède mon bail – Montréal (24,000 members)
What can be done to better prepare for inflation?
First of all, we strongly hope that the situation will improve in the coming months and that the CPI will fall back below the 3% mark. However, as this is not certain, we will bring out the famous adage: prevention is better than cure.
Here are 3 tips to put yourself in a favorable position against inflation:
- Reorganize your budget and keep only the essentials: yes, it is a difficult exercise and it can even be discouraging, but keep in mind that these are temporary measures in order to weather the storm.
- Reduce your debts: there are several solutions to reduce your debts, from debt consolidation to the consumer proposal. This will allow you to reduce the portion of your budget devoted to your debt repayments.
- Invest in yourself: there is one asset that no one can ever take away from you: your know-how. You will never lose developing new talents or taking additional training. It can also be an effective tool to negotiate a better salary or get a new job. There are a ton of trades in high demand that pay good wages.
If you would like to discuss your financial situation confidentially with a financial reorganization advisor, do not hesitate to contact us. Click here to request a free consultation.