For many individuals and families in B.C., it’s been impossible to ignore the effect of rising inflation on your wallet. Every week at the grocery store, the price of something seems to have gone up. It’s the same at the gas pump, when shopping online or when paying your utility bills.

It’s only natural that you may be struggling to make sense of it all. Or maybe you’re looking for some strategies for things you can do to combat rising prices?

Let’s cut through the financial jargon and take a quick look at what inflation is and what causes it, as well as exploring a few things you can do to minimize its impact on your day-to-day and long-term finances. Spoiler alert: It may not be all bad news.

What is inflation?

The Bank of Canada (BoC) definition of inflation is “a persistent rise in the average level of prices over time.” When someone grumbles that a litre of gas costs much more than it did 15 years ago, much of that is down to that steady rise in the average price of gas, i.e. inflation.

A steady rise in the cost of goods and services isn’t a big deal. For most working people, a small annual cost-of-living pay raise helps ensure incomes stay in line with inflation. Governments also typically increase benefits and pensions in line with inflation.

According to the BoC, “low, stable and predictable inflation” is actually good for us. It makes it easier for individuals and companies to plan and budget in terms of how much they spend, enabling the economy to expand in a sustainable way. Businesses grow, new jobs are created and wages rise. Governments generate more tax revenue, which helps improve services. Everyone benefits.

What does the “inflation rate” indicate?

The inflation rate is how inflation is measured. It indicates how much prices increase year to year. The BoC targets an annual inflation rate of 2 percent. This means a weekly grocery shop costing $100 last year would be expected to cost $102 this year. Not too scary, but the problems start when inflation rises rapidly and unpredictably, as has been happening recently. Inflation reached as high as 7.7 percent in June 2022, the highest level for 39 years.

What causes inflation?

Inflation is typically all about supply and demand. When more people want something, but there isn’t enough of that thing to go around, its price typically goes up. As well as a surge in demand, other factors that can cause price increases include higher production, transportation and other costs involved in making and delivering the things we buy.

Many economists consider the recent rise in inflation to be the result of global supply-chain issues during the COVID-19 pandemic, which caused shortages for some things people want. As pandemic restrictions have eased, there has been a surge in pent-up demand for goods and services as our confidence and spending power returned. However, the supply chain has struggled to keep up. Russia’s invasion of Ukraine then happened at the worst possible time.

What does higher inflation mean for your wallet?

Simply put, higher inflation reduces your spending power. Everything costs more so your money doesn’t go as far. You will notice that things like your weekly grocery bill, your heating bill, your monthly gas expenses and other regular household expenses all go up. If you rent your home, your landlord may try to raise the rent to cover their increased costs. Meals out at restaurants or take-out food will also cost more. Entertainment venues may raise ticket prices to offset rising heating and other costs.

At the same time, your income may not rise anywhere near fast enough to keep up with the rising cost of living. People on a fixed income, such a pension, can be especially hard hit.

One thing the BoC does to control inflation is raise interest rates. Rising interest rates makes the cost of borrowing money through a new mortgage, line of credit, or other loan go up. You may see your mortgage and credit card repayments increase. On the flip side, this means a higher interest rate on your savings.

What does this actually look like in dollars and cents? While not all prices rise at the rate of inflation (the price of some more expensive, less essential items may even drop due to less demand)—and the cost of some things can go up much more than inflation—it doesn’t take long to see the effect on your wallet. For example, here’s a sample of a family of four’s monthly expenses:

*This chart represents a rough example of how much your costs increased year-over-year using the Consumer Price Index as a guide.

That’s an annual increase in your expenses of $2,760. As you can see, even before factoring in higher mortgage rates and rents and the higher cost of less essential things you might buy, high inflation has a serious impact on how far your money goes.

While we are painting quite a bleak picture here, it doesn’t have to be all bad news. We’ve already mentioned some possible silver linings in the form of higher interest rates for savers (although potentially having to eat into your savings to pay for things can offset those gains), and the price of some things, such as luxury items, reducing due to a drop in demand. Home owners on a longer-term low fixed-rate mortgage can also breathe easier than those with mortgages coming up for renewal or paying a variable rate of interest.

7 things you can start doing today to fight inflation

The other good news is you can take steps to protect you and your family from the effects of high inflation. Here are a few we recommend.

1. Delay big purchases
If you can put off making a large, non-essential purchase, like a new big screen TV or a family holiday abroad, consider delaying it until the financial picture looks a bit less murky.

2. Pay down debt
When interest rates are high, try to pay off your credit card promptly. In general, aim to pay down as much of your debt in general as quickly as possible, and avoid taking on much new debt if you can. If you are a home owner with a variable mortgage, consider switching to a fixed rate. A fixed rate is generally higher than a variable rate, but it does provide for some certainty for budgeting.

3. Cut back on non-essential spending
In general, try to cut back on all non-essential spending if you are worried about the rising cost of your regular monthly outgoings. Can you make your morning coffee at home? Do you need multiple TV service subscriptions? Try not to cut back on treats completely, though. We all need a pick-me-up now and then.

4. Lower your utility bills
If your bills are rising fast, take steps to lower them. Consider relatively easy things like using draft excluders, buying a thicker quilt, dressing more warmly around the house, and turning off lights when not really needed.

5. Earn rewards for purchases
Make full use of points and other rewards programmes to save money on things like groceries and gas. If you need to rely on a credit card, consider a cash-back credit card or one that lets you earn points for things you really need. While the rewards may seem small, they do add up.

6. Embrace your inner DIYer
Fixing things around the house yourself that you would otherwise pay someone to do can help you save some money. You can also make some easy improvements to lower your heating bills, like blocking off drafts. Check out CleanBC Better Homes to see if you qualify for any energy-saving rebates.

7. Budget, save and invest wisely
Whatever your financial situation, it’s a good time to review and update your budget and financial plan. This includes looking for places to cut down on spending and maybe even saving more to take advantage of higher interest rates. If you are an investor, consider talking to a financial advisor about adapting your strategy to the market conditions.

Remember, you don’t need to face up to this difficult economic period alone. Our advisors are here to help you any way we can, whether it’s recommending a savings product to take advantage of higher rates or working with you to update your financial plan.