The Steady March Of Inflation

What were you doing in 2006? Maybe you were humming the latest Beyonce hit Check on It, or standing in line with your kids to see Ice Age: The Meltdown. Or, maybe you were discovering the newest social media craze and opening a Facebook account.

Conservative Stephen Harper became our new Prime Minister, defeating Liberal Paul Martin.

It was also the year when the average Canadian home cost just under $300,000 (average of 12 major Canadian cities, Canwest News Service). If you were waiting to buy, just 10 years later, in 2016 the average home had risen to $489,590 (CREA).

That’s because of the steady march of inflation.

The Steady March of Inflation

How inflation is calculated

The prices of goods and services are constantly changing. For most products, the change is slow and not too noticeable on a day-to-day basis, but it makes a big difference over time.

Related: The incredible shrinking food package

The most common tool for measuring inflation is with the Consumer Price Index (CPI) which tracks the cost of a “basket” of goods and services that the average Canadian buys regularly.

The benchmark year in which the CPI equals $100 is currently 2002.

Compare October, 2016 – $129.10, with October, 2006 – $109.00. You would be paying $20 more for the same item. That’s an 18.5% increase in ten years.

Price changes can vary widely across a large and diversified country like Canada. The following table shows average prices for illustration purposes only:

  2006 2016
Home $300,000 $489,590
Passenger vehicle $25,550 $27,570
1 litre of gasoline $1.069 $1.084
Annual cost of food (family of 4) $7,305 $8,109
Weekly earnings $727.78 $959.27

You’ll notice that not all prices have the same percentage increase.

Just for fun, here are some other interesting changes (that really have no correlation the CPI):

  2006 2016
5-year mortgage rate 6.45% 4.66%
5-year GIC rate 3.20% 2.00%
1-oz Gold $622 $1,135
S&P/TSX Composite Index 12,783 15,292

Final thoughts

Think about what would happen if your income stayed the same over 10 years, while prices for most basic goods continued to increase with inflation. In reality, because you would be paying more for the goods and services you need, your disposable income would be shrinking.

This is the primary reason why it isn’t a good idea to keep the majority of your money in a savings account where you might be lucky to top 1% in interest.

A smart saver wants their savings to at least keep up with or, ideally, beat inflation.

Inflation is especially important to consider when forecasting your retirement savings.

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1 Comment

  1. E.B. on December 21, 2016 at 3:47 am

    Thanks for this interesting article. One way to beat the inflation is to invest in stocks or trading with options. But of course it is a premise that one grapples with this subject.

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