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Managing The Gap Between Wage Growth And Inflation

The gap between wage growth and cost of living continues to be an issue as inflation reached 2.3 percent in May, led by higher gas and energy prices.

The latest Stats Canada data revealed that wages grew 1.4 percent year-over-year.  That means there’s a decline in real wages when you adjust for inflation.

How have we managed the gap between wage growth and inflation?  We’re borrowing at record levels on everything from housing, cars, and discretionary spending.  With rock-bottom interest rates, many home owners think nothing of rolling over excessive consumer spending into their mortgage.  The home equity line of credit has become a second income.

I looked at my own personal inflation rate and noted that my wages have been frozen since July, 2012.  That means zero income growth to battle the effects of inflation, not to mention the needs of a growing family.

Related: Why our debt to income ratio is misleading

The biggest inflation offenders:

Home insurance is up 30 percent as our area was hit with flooding and hail damage last year.  Of note is a new mandatory $300 hail insurance premium.

The price of a barrel of oil hit $115 this month and that has spilled over to an increase at the pumps.  Our own fuel consumption is up 23.7 percent this year, but it’s tough to say whether that’s due to a price increase or more driving.  It’s likely a bit of both.

(Do higher gas prices affect your summer driving plans?)

The electricity and gas bill – courtesy of Enmax – is up 20.2 percent.   I’ve gone with a floating rate for gas and saved a ton of money over the years as natural gas prices were at historical lows.  However, prices went up (a lot) this winter and I paid for it.

Our water bill is up 12.9 percent on higher consumption.  I blame the children.

Grocery spending has increased 12.2 percent.  Food is not included in the “core” inflation rate, as it is deemed too volatile.  Indeed, we’ve seen prices for beef and chicken rise more than 10 percent this year.  Even (gasp!) bacon prices are up a shocking 20.5 percent.

We spent 300 percent(!) more on kids’ activities this year as our oldest started piano lessons, ballet, and pre-school, while our youngest tried gymnastics.  I expect these costs will continue to increase as our kids get older.

A side-effect of all the extra activities in our schedule meant a 6.4 percent increase in restaurant spending this year.

Related: What’s busting your budget?

In the category of things that only kept pace with inflation, our property taxes went up just 1.45 percent this year.

And in the surprise of the year, our car insurance premiums went down 6 percent (for no particular reason).

Final thoughts

The gap between wages and expenses is one reason why I focus on creating a second income stream in my spare time.  The extra income allows us to live a comfortable lifestyle while still achieving our savings goals.

If wages continue to stagnate, it will become even more difficult to keep up with rising inflation without going into debt or making a serious reduction in lifestyle.

How do you combat your personal inflation rate?

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11 Comments

  1. Dan @ Our Big Fat Wallet on June 22, 2014 at 11:11 am

    It’s great that you even know your own budget stats in so much detail (ie. 6% increase in restaurant spending) as many people don’t. To combat inflation I signed up for a fixed electricity rate which seemed like a bad idea in the beginning but turned out better when prices started to creep up. I also review our cable bill, insurance coverage and other monthly costs periodically to see if they can be decreased.

    The price of food has increased substantially the past year, likely related to higher fuel costs. If I can’t afford to buy bacon there really is no point to life! 🙂

    • Echo on June 23, 2014 at 3:28 pm

      We’ve started eating less meat to combat food inflation, but as a born-and-bred Albertan it just doesn’t feel right to have a meatless supper 🙂

  2. Addison @ Cashville Skyline on June 22, 2014 at 11:12 am

    Great article! My wages have been stagnant for a couple of years, as well. Generating passive income streams is a smart way to fight it. I am similarly focused on this. I’m also always looking for ways to increase my rate of savings by cutting back on expenses.

    • Echo on June 23, 2014 at 3:31 pm

      Hi Addison, I wouldn’t say I’ve given up on finding ways to cut expenses (I’ll always be frugal by nature), but at some point it’s easier to find ways to increase income rather than cutting expenses to the bone.

      A balanced approach is probably best.

  3. @takehomepay on June 22, 2014 at 1:16 pm

    Scary!! Our wages are not going up, and our take-home pay is going down!! Also, I find it interesting that it’s cheaper to live in our mortgage-free home: $6,700/yr; than our loan/lease-free vehicles(2): $11,300. I also find it interesting that our cable bill has tripled over the last 22 years, while our gas bill has only doubled. Food prices are truly unbelievable… remember when bread was $0.25 or 12% of minimum wage hourly rate; now it’s $3.00 or 28% of minimum wage hourly rate and that’s not even take home pay!!!!! Don’t get me started. 😉

    • Echo on June 23, 2014 at 3:35 pm

      That’s an interesting statistic on bread prices as a percentage of minimum wage.

      Cable has probably tripled because we’ve been convinced we need more channels, special packages, PVRs, time-shifting, etc.

  4. Chris on June 23, 2014 at 7:21 am

    What is the message this gives to the working class people of this country that rich are getting richer and working class getting poorer and poorer all over the world and not only in canada.

    • Max on July 24, 2014 at 8:31 pm

      Very well said!

  5. Peter on June 23, 2014 at 11:18 pm

    If capital grows faster than economic output, which seems to be the view of a lot of smart people and an echo of Chris’s comment, then my strategy is to use ultra-low interest rates to buy income properties, particularly distressed properties or locations with a good chance of capital appreciation, and to take advantage of every rebate I can find (e.g. insulation grants, solar panel/MICROFIT) to fight rising costs. We’re also continuing to buy other assets such as stocks. My aim is to match my work income with income from assets as fast as I can. So far it’s working pretty well but I won’t know for about 3-5 years.

  6. John Wilson on June 24, 2014 at 6:46 am

    The financial repression by central banks is responsible for miniscule interest rates and increased income inequality.
    Although it is difficult for working Canadians, it is even more challenging for those on fixed incomes.
    The good news is that such conditions have existed before ,and eventually are resolved. The excessive returns on capital are not permanent.
    On a personal basis, I notice significant increases in food prices,insurance prices,utility and telecom prices,which can be limited by careful shopping habits, changes to insurance coverages,upgrades in energy efficiencies,and reductions in TV choices. For the first time in years my property taxes went down marginally. As consumers we need to pay attention if we wish to stretch our incomes to meet rising inflation.

  7. Kathy Waite Eureka Investor Guidance on June 30, 2014 at 8:43 am

    In Saskatchewan we have just found out on top of the average family home going from $160k to $400k our power bills are going up by 20%.
    I am not seeing ordinary families benefit from the “boom” here. if you had a rental home or are in the trades servicing oil/ gas/ potash you do.
    The average call centre/ bank/ admin person is still on $45k a year not $45 an hour.
    I am encouraging clients to list expenses and get to be more conscious spenders like Rob is, take action now before you get into debt. Its crazy what people say they “need” cable at $125 per month two cells at $250 but save nothing.
    Just wait to interest rates go up…………

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