Inflation Rates Aren’t As Bad As They Seem

Inflation targeting has been the cornerstone of monetary policy in Canada since 1991.  The Bank of Canada aims to keep inflation rates at the 2 per cent target, the midpoint of the 1 to 3 per cent inflation-control target range.

Since 1991 that is exactly what has occurred, as inflation rates have averaged out to be 2 percent per year over the past 20 years.  But in December 2010 the total Consumer Price Index went up by 2.4%, leading many to believe that rising inflation is becoming a serious threat.

Inflation Rates: Are Things Really That Expensive?

Rising prices really get people worked up in our society, and rightfully so.  It means more money coming out of your budget each month for essential purchases and less money available for savings and discretionary purchases.

We love to complain about the prices at the pump, the cost of chicken at the grocery store, and our monthly cell phone bills.  But are things really that much more expensive than they were 5 years ago?  Are you better off now than you were 5 years ago?

I find it interesting that when prices are falling we don’t make such a big deal but when prices are rising it seems like there is no end in sight.  How often did we hear about the price of oil going to $200+ per barrel back in 2008 when gas prices hit a record high of $1.42/litre in Canada?  But later that year prices at the pump fell sharply down to $0.73/litre and we barely noticed.

The average Canadian gas prices in the Spring of 2006 were exactly the same price as they are today, at roughly $1.13/litre.  Meanwhile how much has your income risen over the last 5 years?

It’s Volatile But Not Out of Control

People are more familiar with the volatility of the stock market since they see these charts more frequently than commodity price indexes.  Yet the same patterns emerge within commodities markets, so we have to expect similar peaks and valleys as we do with the stock market.

Yes, the cost of certain commodities have risen substantially over the past few years, but that doesn’t mean that our standard of living has diminished just because the price of coffee has doubled.  But the doom-and-gloom forecastor’s would have you believe that we’ll be rationing our cans, standing in line for bread, and rioting in the streets.

Financial Uproar posted an article about how food prices are rising, but that most people would barely notice in North America since food does not make up a huge part of our monthly budgets and because companies are cleverly packaging their product at lower weights.  This is true, especially here in North America.

We take it for granted that our expenses for essentials are cheap compared to other parts of the world, and especially compared to our incomes.  We’ve had some tough economic times here lately, but I would guess that the majority of working Canadians’ wages have risen by at least 10% over the past 5 years to keep up with inflation.

It’s Not Inflation That We Need To Worry About

The Bank of Canada is in a difficult situation right now because in order to keep inflation rates from moving above the target rate of 2 percent they will need to increase the overnight lending rate.  This triggers interest rates to rise and the dollar to go up, then causing a decrease in demand which leads to lower production, and results in lower prices.

The problem is, interest rate hikes will aggravate 2 additional problems – the exchange rate and the real estate market, both of which are critical to the continued economic recovery.

The Bank of Canada will continue its monetary policy of keeping inflation low, stable and predictable.  So while Mark Carney stick handles his way through this economic recovery, we shouldn’t worry so much about the rising inflation rates.  What we need to be concerned about is the effects of containing inflation by raising interest rates, and how it will impact the exchange rate and our housing market.

Print Friendly, PDF & Email


  1. Jeff Gingerich on February 16, 2011 at 8:27 am

    Low interest rates and higher prices for the “must haves” leave the working poor and seniors vulnerable. There has to be a balance somewhere or the wealth disparity will increase and that’s not the Canada I call home.

    • Echo on February 16, 2011 at 9:02 am

      Hi Jeff, those groups are certainly vulnerable to rising prices and it will be interesting to see how the BoC handles all of this in the short term.

  2. Balance Junkie on February 16, 2011 at 8:30 am

    I would say that shrinking packages and static prices add to the illusion that inflation is not a problem. If you’re getting less for the same price, that’s a price increase. We may not have rioting in the streets here, but we do have it in Egypt, Tunisia, Yemen, Iran, Jordan, Bahrain, Algeria, Libya and many other countries.

    Inflation may not be a huge issue in Canada yet, but producers can only hold off on price increases for so long until they either pass them on or take the hit on margins. Yesterday the World Bank said that rising food prices are pushing 44 million people into poverty and the Globe had a headline that pointed out that small businesses are being hurt by rising commodity prices. That sounds like a problem to me.

    • Echo on February 16, 2011 at 8:58 am

      This is definitely a problem in the countries that you mentioned, but do you think inflation is affecting the average Canadian? Do you believe that the BoC will be unable to contain inflation between the 1-3% target range?

      Food has a 17% weighting in the overall CPI and rose 1.7% year-over-year, and I would guess that the average Canadian hasn’t felt the pinch.

      • Balance Junkie on February 16, 2011 at 9:14 am

        I think inflation is affecting the average Canadian, but probably not enough to really feel it – yet. I feel it every time I go to buy those giant bricks of cheese that used to be 750g and are now 500g – but then I have 3 growing boys and that’s an inflation issue on its own. 😉

        I think we need to be careful about how much we rely on reported inflation as well. China just reduced the weighting of food in their CPI index to pretty up the numbers a bit. The U.S. has changed the way they calculate CPI 9 times since the 1990s.

        Your point about contained vs. runaway inflation is a good one, and truthfully, I don’t know how this will all end. It could end with a financial crisis as it did in 2008, or inflation could continue to rise such that central banks need to act. The question then becomes whether they will do so in time, and whether the Bank of Canada can be effective if the U.S. Fed is not.

        I don’t think we need to stock up on canned goods, but it wouldn’t hurt to keep an eye on the situation and buy some good chocolate on sale before the recent rise in cocoa prices hits the store shelves. 😉
        Thanks for raising some great questions Echo.

        • Echo on February 16, 2011 at 10:07 am

          Good point about the numbers being manipulated to look better in reporting CPI data.

          PS – I bought some Bernard Callebaut chocolate on Valentine’s Day and I think that either the rising cocoa prices have hit the store shelves, or Bernard Callebaut forgot that they went into receivership last year and should maybe lower their prices 🙂

  3. Money Smarts Blog on February 16, 2011 at 2:38 pm

    Good post. It’s nice to see someone write about inflation and not talk about sky-high rates and government conspiracies. 🙂


    • Echo on February 16, 2011 at 2:46 pm

      Thanks Mike, when you strip away all of the peaks and valleys and realize that inflation averaged exactly 2% over the past 20 years, there’s really not that much to get worked up about.

  4. The Passive Income Earner on February 16, 2011 at 2:58 pm

    Nice post. I am really curious how the exchange rate will change over the coming years … Are we done with having a low Canadian dollar? Is this going to be the new norm with countries targeting our natural resources?

    I certainly haven’t seen any drop in prices locally to match those of the US …

    • Echo on February 16, 2011 at 4:26 pm

      Who knows where the dollar is headed, and is the increase due to our loonie’s strength or the weakness of the green back?

      I remember when everyone in Canada was up in arms about why our prices were higher than the U.S after our dollar peaked around $1.07, but then it came back down below par soon after. I don’t expect prices to change much, afterall it is way more expensive to distribute goods here in Canada than in the U.S.

      We have 1/10th the population of the U.S. and our major populations centres are spread out a lot further than they are down south.

  5. Financial Uproar on February 16, 2011 at 4:57 pm

    Thanks for the mention.

    Like you say, inflation isn’t that big of a deal. If it keeps happening, the Bank of Canada raises rates. Inflation is part of economic growth, especially with increased money supplies.

    If food represents 20% of someone’s budget (which I’d say is a high estimate) and it does up 10%, that’s only an additional 2% of salary dedicated to food. Big deal.

    • Echo on February 16, 2011 at 5:05 pm

      I only spend 10% of my budget on groceries and dining out. Probably less because some of that will include toilet paper, garbage bags, cleaning supplies, etc. Shop smart and pick up a few things on sale and you certainly won’t notice the increases. Then use your credit card and get some cash back or PC points to help put some money back in your wallet.

      But stay away from the chips 😉

  6. My Own Advisor on February 17, 2011 at 9:04 pm

    Good post, but it’s hard to stay away from the chips!

    Very true, 2% is nothing to get worked up about but you have normalized the data. Peaks will be higher in the years to come. We’re gonna have more folks out of the workforce in another 15 years than in it. That’s not a good thing. Not to mention if oil goes and stays over the $100/barrel barrier, you’re going to see food prices and everything else spike.

    Will it happen sooner than later? I don’t know, but tougher times are coming eventually and I think it will be a good thing if interest rates get back to 4 or 5%. Reward savers and not spenders 🙂

    • Echo on February 17, 2011 at 9:36 pm

      Hi Mark, it’s the BoC’s mandate to keep inflation between 1-3%, which they have managed to do for the past 20 years. Yes, interest rates will probably rise, which brings its own unique set of challenges. But I just don’t buy into the doom and gloom forecasts, markets are cyclical and will eventually average out to historical returns.

  7. Steph on February 25, 2012 at 11:35 am

    This looks like Conservative propaganda to me. Beeing a family of 6 it costs us over 1200 dollars a month to feed the family. That represents over 25 percent of our income. Throw in rent and utilities which costs us another 50 percent of our income. We’re left with about 20 percent of income for fuel, cloths, toiletries, gifts entertainment and so on. So really, on an income of 48,000.00, we mange to just squeak by hoping the car doesn’t break down and so on and so forth.
    It’s extremely depressing going to work knowing there will be no extra money for anything. No hope of saving money. We can’t shave anything more off the budget. The cost of living is eating all our income.
    We don’t own new vehicles nor do we have consumer debt. This is the case with most of the people we know.
    for the last 8 years we’ve heard so called “experts” saying this is good and all is well and business is to big to fail. The fact of the matter, these so called big money making “experts” have been wrong. Financial collapse, housing collapse all happened south of the border and so on. We are not immune to these things in Canada and this story isn’t helping anyone or anything in the real world. You take us all for idiots, but i can see who the real idiots are reading some of these comments.

Leave a Comment

Join More Than 10,000 Subscribers!

Sign up now and get our free e-Book- Financial Management by the Decade - plus new financial tips and money stories delivered to your inbox every week.