~Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.
– Ronald Reagan
Imagine that you had $40,000 cash, and you decided to stuff it under your mattress (something we don’t recommend by the way!) Almost every year, prices increase due to inflation. What’s the effect of inflation on your purchasing power over time?
| # of years | Purchasing power of $40,000: |
|---|---|
| 5 | $35,354 |
| 15 | $27,619 |
| 25 | $21,576 |
*assuming 2.5% inflation rate
After 25 years, you are able to buy only about half of what you used to.
The general inflation rate in Canada is measured by the Consumer Price Index (CPI). CPI reflects the rate of price change for goods and service bought by Canadian consumers.
Statistics Canada says that “CPI is relevant to all those who earn and spend money”…in case that wasn’t obvious!
Here’s where things get interesting though. Not everyone’s inflation rate is the same. CPI is based on a particular basket of goods and services. Because each of us consumes goods and services differently, we will each have our own personalized inflation rate.
For example, within the Food category, CPI includes over 70 items including:
- Meat
- Cheese
- Nuts
- Coffee
- Confectionary
If you are a vegan with a nut allergy who is trying to kick your sugar and caffeine habits, then your inflation rate for food may be quite different than the CPI calculation.
A recent article outlined the cost differences in specific categories since last year. Compared to 12 months earlier, Canadians paid:
- 14.2% less for gasoline
- 3.2% less for computer devices
- 13.2% more for fresh vegetables
- 5.2% more for restaurant food
Therefore, someone who shops organic fresh groceries, doesn’t drive, and lives in a condo without rent control has a much higher inflation rate than a car driving, tech loving, rent controlled individual.
CPI measures an average basket of goods for 36 million Canadians. There’s a low chance that anyone’s spending exactly mirrors how the CPI is measured. This doesn’t mean that CPI is useless but it does have limits to its applicability to individuals.
Inflation is a significant factor in your financial plan, especially during retirement when your ability to generate income is reduced. Make sure that your financial planner takes a responsible approach to account for inflation (one that doesn’t involve stuffing cash under your mattress)!
Rona Birenbaum is a certified Financial Planner and is licensed to do financial planning. Rona is registered through separate organizations for each purpose and as such, you may be dealing with more than one entity depending on the products purchased. Rona is registered through Caring-for-Clients for financial planning services. This website is not meant as a solicitation for financial advisory services. Financial advisory services are available through the facilities of Queensbury Strategies Inc. Financial Planning is not the business of or under the supervision of Queensbury Strategies Inc. and Queensbury will not be liable or responsible for such activities.