What is inflation and what does it mean for the average Canadian?

With inflation near a 40 year high in Canada, I’m sure you’ve felt the pain when you went to the grocery store or filled up your car like a lot of Canadians. Let’s look at what inflation is and what it means for the average Canadian.

Quick Links

1. What is inflation?
2. The Consumer Price Index (CPI)
3. What does inflation mean to the average Canadian?

What is inflation?

Inflation is price increases of all goods and services in an economy over time. This affects the purchasing power of a society. (Purchasing power is how many goods and services can be bought with a fixed sum of money.) When the prices of goods and services increase, fewer of those goods and services can be purchased with that same sum of money. That in a nutshell is inflation.

The opposite is inflation is deflation. That is when the prices of goods and services fall over time.

A little bit of inflation is considered a healthy thing. It’s the signs of a growing economy. However, too much inflation can be a bad thing. Too much inflation means that your purchasing power rapidly falls.

Venezuela is an extreme example of this. The country is experiencing inflation in the hundreds of percentage points. Germany experienced similar inflation after World War I. In a society like this it makes it difficult for the average citizen to afford basic goods and services like food and transportation.

The Consumer Price Index (CPI)

Something that the media likes to talk a lot about the Consumer Price Index or CPI for short. The CPI measures inflation, but for households.

The CPI measures changes in prices for goods and services for consumers. It does this by looking at the changes in prices of a fixed basket of goods and services households commonly buy.

In Canada this is done by Statistics Canada (StatsCan). StatsCan measures the CPI by dividing it into eight major components: Food; Shelter; Household operations, furnishings and equipment; Clothing and footwear; Transportation; Health and personal care; Recreation, education and reading, and Alcoholic beverages, tobacco products and recreational cannabis.

Since prices vary by the region of the country, the CPI is published for all 10 provinces and three territories, as well as other major population centres throughout the country.

The inflation rate is a more all-encompassing figure than the CPI. That’s because unlike the CPI, the inflation rate includes the increase in prices for both businesses and consumers. Whereas, the CPI is focused just on consumers.

It’s not correct to say that one is more accurate than the other. What is correct to say is that both inflation and the CPI measure different things. The CPI would be more relevant for the average Canadian.

Our central bank, the Bank of Canada’s main goal is to keep inflation and the CPI under control. It aims to keep inflation between one and three percent. In an ideal world, inflation would be at two percent. The inflation target our central bank uses looks at the yearly increase in the total CPI.

What does inflation mean to the average Canadian?

Inflation affects Canadian in all sorts of ways. If inflation is increasing faster than your paycheque at work, it means that your purchasing power is falling. This can result in a decrease in your standard of living. Unless you’re able to earn more at work, you’ll need to cut back from your spending from somewhere, thus, resulting in a lower standard of living.

Inflation especially hurts those on fixed incomes, such as seniors. Even average inflation over 20 or 30 years could mean that the purchasing power of seniors falls by more than half.

The easiest way to see inflation in action is at retailers. When you go to the store and notice the price of something that you normally buy has gone up, that’s a prime example of inflation.

In summary, if your wages keep up with inflation and the CPI, you should be fine. If your earnings don’t keep up, that’s when you’ll see a decrease in your standard of living, which nobody enjoys.