Inflation refers to a general increase in the price of goods, services, and the overall cost of living. Or, we could explain it as a decline in the purchasing power of money. Inflation could result from a shortage in supply, an increase in demand, or an increase in how much money each citizen has access to.
The effects of inflation have become very apparent to Canadians in the past few months; there have been soaring costs of gas, food, and increases in the costs of services and utilities. This means we can afford less than before because we are paying more than before. The broader impacts include lowered standard of living, stress, and anxiety in consumers, job cuts, increased interest rates, increased individual debt, and even a recession.
Inflation typically follows major events like war, natural disasters, political turmoil, or as we’ve seen recently, pandemics. This is because these things lead to a shortage of resource supply, labour supply, and uncertainty. There are instances where governments have deliberately decreased the value of their currency to attract overseas investors and trade, but this also causes inflation because when the dollar value decreases, consumers get fewer things for their dollar.
It is very difficult to get an accurate prediction of how long inflation will last. This is for several reasons including the fact that inflation is tied to events like the ones mentioned above and things like war and political turmoil can go on for years. Also, governments cannot be certain that the measures they put in place to combat inflation will actually work. There is only so much that can be done to influence consumer spending habits and so we also play a role in how long inflation lasts by how we handle the changes in supply and demand.
Some of the measures the government will use include the central bank increasing interest rates so that the cost of borrowing becomes more expensive and hopefully deter consumer spending and the utilization of credit products. They may also restrict the supply of money in the country, increase wages to match inflation or restrict prices where they can. But in a free market economy, like Canada, the government has limited control over wages and prices, as this is determined by the market itself.
Private entities like companies may combat inflation by lowering their prices of offering more favourable deals to consumers. Companies will also try to cut back on their own spending since they too are affected by the cost of goods and services. By cutting back on spending they may save themselves some money and can limit how much they charge consumers.
As individuals, we can combat inflation by lessening our spending, and instead trying to increase how much we save. We would need to reassess our budgets and control our demand where we can. This includes things like delaying buying that new car if you can, fewer Amazon purchases, and using your credit card less. The truth is though, that not everyone can make adjustments to their budget and many Canadians are suffering as a result. These people tend to be fixed-income earners like people on disability and pensioners. Also, students who can only earn so much while they study, parents who were already struggling or on tight budgets, and the list goes on.
Some inflation is good for an economy and in Canada, the central bank likes to keep this around the 2% mark. Small amounts of inflation are inevitable as people start earning more and having more access to money through credit products, or by improving their skills and education thereby gaining more money through better employment opportunities and with technological innovations new products and services are offered every day and sometimes demand will outweigh that supply and lead to a price increase. Just think of how we heard our parents say “gas used to be .60 a gallon back in my day” or how a family home was $30, 000 and under when our grandparents bought their homes. These small amounts of inflation can become an issue when the increase in wages isn’t matching the inflation rate, as is often the case in a lot of economies.
Overall, inflation is here to stay but with concerted efforts by governments, companies, and consumers, we may at least see it brought back down to a manageable level.
How KOHO can help
Using a prepaid card is a great way to control your spending because you can only spend what you have.
KOHO has a range of tools that can help with staying on budget and up to date with savings goals like our RoundUp feature, Vault, Goals, Earn Interest and Budget Insights.
Your KOHO card isn't just a prepaid card, you also have access to many banking features like maintaining a savings and spending account, bill payments and e-transfers.
If you are a premium member or you have purchased one of the bundles, you get access to Financial Coaching.
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