How does inflation affect you?

You’re considering borrowing money for a major life event. But why are interest rates so high? The answer is inflation. Inflation shows us how the economy is doing and where it is headed.

The Bank of Canada defines inflation as “the persistent rise over time in the average price of goods and services – in the cost of living.” A rise in inflation means that your paycheck won’t go as far as it did last year; things now cost more. If you have a fixed income, you may need to tighten your budget.

While inflation may strain your pocketbook, it can benefit the economy. A low and stable inflation rate (between one to three per cent) helps create long-lasting economic growth and jobs. If inflation goes below or above this rate, the Bank of Canada will “nudge” the economy in the right direction.

The Bank of Canada keeps inflation in check by regulating how much money circulates and by raising or lowering interest rates. They raise interest rates if the Consumer Price Index (CPI) (which looks at the cost of things like food, shelter, and transportation) gets too high.

When interest rates go up, loans and mortgages are more expensive. It becomes more appealing for you to save rather than borrow. Because there are fewer shoppers in the marketplace, there is a decreased demand for goods and services. This often leads to lower prices, which puts more spending money in your pocket.

If you aren’t required to borrow, think about waiting until interest rates are lower. Or, put the money you save from cheaper purchases towards interest fees.