Inflation

Inflation is the gradual increase in the price of goods and services over time. When inflation is 3%, something that costs $100 today would cost $103 a year from now. Your money doesn’t disappear, but it buys less. That’s why a chocolate bar that cost $0.50 twenty years ago now costs $2.

Why it matters for your money

Inflation is the reason keeping all your savings in a regular bank account slowly works against you. If your money earns 0.5% interest but inflation is running at 3%, your purchasing power is actually shrinking by about 2.5% every year. You have the same number of dollars, but they do less.

This is one of the main arguments for investing. Over long periods, stock market returns have historically outpaced inflation. Keeping your money invested over time is one of the most reliable ways to make sure your savings don’t lose value.

How it’s measured

In Canada, inflation is tracked by Statistics Canada through the Consumer Price Index (CPI). It measures the cost of a basket of common goods and services, including food, housing, transportation, and clothing. The Bank of Canada targets an inflation rate of about 2% per year.

What affects it

Inflation can be driven by many factors: supply chain disruptions, government spending, wage growth, energy prices, and central bank policy. When inflation runs too high, the Bank of Canada raises interest rates to cool things down. When it’s too low, they cut rates to stimulate spending. These rate decisions ripple through mortgage rates, savings account rates, and bond yields.

A concrete example

If you have $50,000 sitting in a savings account earning 1% interest while inflation runs at 3%, your money grows to $50,500 after a year. But the purchasing power of that $50,500 is really only about $49,015 in today’s dollars. You gained $500 in interest but lost roughly $1,500 in buying power.