What is Inflation?

Inflation could have impacts on both individuals and businesses. Lowered purchasing power occurs when the value of money decreases over time and goods and services cost more. It’s important to understand what inflation is and how it works to help you manage your personal finances during inflationary periods.

Inflation is the rising price of goods and services associated with the cost of living. Inflation means that the purchasing power of money decreases, and more units of currency are required to buy the same goods and services that previously cost less. Inflation is typically measured by the Consumer Price Index (CPI)¹ which represents the changes in prices that Canadian consumers experience. It measures this change by comparing the cost of certain fixed goods and service over time, which can give us an idea of the effect of inflation. Inflation can be classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation.²

How Inflation Works and Its Causes

Inflation can be influenced by a variety of economic factors.

One type of inflation is called “demand-pull inflation”², which happens when there is more demand than there is a supply of certain goods and services. When demand is higher than the availability of goods and services, the price of these items can go up.

“Cost-push inflation” is driven by production costs of a product or service¹. When there is an increase in the cost to produce something (for example, raw materials or energy) the added costs can be passed on to consumers through price increases, which can contribute to inflation.

The third type of inflation is called “built-in inflation”². As inflation impacts from cost-push and demand-pull result in higher priced goods and services, employees at various companies may ask for higher wages in order to afford the higher costs of living. In order to maintain profit levels, an employer or company may increase the price of their product or service as a result. This price increase may mean that consumers pay more as a result of wage increases.

What could inflation mean for Canadians?

The purchasing power of Canadians’ income can be affected if the cost-of-living increases as a result of inflation, and they may need to create a game plan to help their money go further.

Impacts from inflation could mean that first-time home buyers may need to look at saving more for a down payment before they can enter the housing market. These impacts could also mean that Canadians might look for ways to save on their everyday shopping like groceries. Read our articles on budgeting tips.

Coping with Inflation

While Canadians may not have direct control over inflation there are some strategies that could help lessen its impact.

Prioritizing Budgets: Reviewing a household budget to identify areas where spending could be reduced. For example, you need to budget to cover essential needs first and reduce or remove expenses for items that are not essential.

Identify where your money comes from and where it goes with our TD Personal Cash Flow Calculator.

Diversifying Investments: Over time inflation can have an impact on investments. Diversifying your investment portfolio can be a useful tool to help reduce inflationary risk on your long-term investments.

Seeking Alternatives or Purchasing on sale: When faced with price increases, consumers can try to find better deals or explore alternative brands or products that may be on sale.

Reduce or Consolidate Debt: Debt consolidation of your outstanding loans, including any credit card debt, could permit you to negotiate a lower interest rate than what you are currently paying for each of these debt items. This could help decrease the overall amount you are paying. Speak to a TD advisor about debt management.

What's Next for Inflation?

Predicting the future of inflation can be challenging given the various economic factors and global events that influence it. Impacts such as economic growth, consumer spending, government policies, and global economic conditions can all have an influence on inflation.

The central Bank of Canada (BoC) is responsible for monitoring inflation and aims to keep the annual inflation rate within a target range. Speak to a TD advisor who can help you create a plan to help maintain your financial health during periods of inflation.