Weekend Reading: Let's Talk Inflation Edition

Since 1991, the Bank of Canada has used an inflation-control target framework to guide Canada’s monetary policy. The goal is to keep inflation at 2%, the mid-point between its target range of 1-3%. The inflation target framework is reviewed every five years, with the most recent agreement in place until the end of 2021.

The current inflation targeting framework aims to keep inflation low and predictable. This allows individuals and businesses to make long-range financial plans that will contribute to the well-being of our economy. This approach has largely been successful, with price increases averaging around 2% for three decades. That’s a far cry from the inflation-ravaged late 1970s and early 1980s, when inflation peaked at more than 12% in 1981.

It’s fair to say that the extraordinary stimulus measures resulting from the Covid-19 pandemic has forced central banks and governments around the world to review their monetary policy framework as it relates to deficits and inflation. 

Earlier this week, U.S. Federal Reserve chair Jerome Powell announced a major shift in how the central bank will help guide the economy with a focus on low interest rates and job growth. It will tolerate slightly higher inflation in an effort to achieve maximum employment.

North of the border, the Bank of Canada is also reviewing its approach to monetary policy and exploring potential alternatives. It released a “Let’s Talk Inflation” survey – open until October 1 – to get feedback from Canadians on how the current inflation targeting framework affects them and how it compares to other potential alternatives. 

Reading between the lines, it’s clear that the Bank of Canada is seriously considering a shift in approach – one that will likely mirror the Federal Reserve’s new “tolerance” for higher inflation in the pursuit of job growth.

Take the Bank of Canada survey here and let me know your thoughts on inflation in the comments below.

In the meantime, if you’d like to better understand how monetary policy actually works, I highly recommend Stephanie Kelton’s aptly-time book, The Deficit Myth. You’ll see why central banks are on the right track with their thinking around inflation and job growth, and why governments on both the left and right screw it up by equating government spending with household spending.

This Week(s) Recap:

Our kids are heading back to school next week and so our stay-at-home summer is officially coming to a close. We are anxious about sending the kids back but we’re looking forward to the new routine. Obviously my wife and I are incredibly fortunate that we both stay home full-time and don’t have to balance childcare and working arrangements. I know many other parents aren’t so lucky.

Last week I shared how to give financial advice to your Millennial and GenZ kids

I also looked at preparing for retirement and understanding your new spending patterns.

This week I shared the risk of carrying a mortgage into retirement

Promo of the Week:

Like many of you, we’ve been doing a great deal of shopping online during the pandemic. Whenever I do, I try to remember to visit an online cash back rebate site first to earn an extra percent or more on the purchase. It’s like doubling up on your credit card rewards. There’s two sites that I visit regularly to take advantage of cash back rebates: Great Canadian Rebates and Rakuten (formerly Ebates.ca):

Become a member of Great Canadian Rebates and take advantage of online coupons and earn cash back rewards. GCR features over 400 merchants to satisfy all your shopping needs.

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You can also read my Great Canadian Rebates vs. Ebates Canada comparison guide here.

Weekend Reading:

The Credit Card Genius team put together a study on what your credit card benefits are really worth. It looked at nine major credit card perks and put a dollar value to each of them. Great stuff!

Read why Irrelevant Investor Michael Batnick will never go to a car dealership again. I have to agree.

The editorial board at the Globe and Mail says that a fight in Canadian real estate reveals the true problem: We need a lot more housing.

An incredible look at the decline of upward mobility in one chart by Visual Capitalist.

The five largest stocks in the S&P 500 have a market capitalization that equals the smallest 389 stocks in the index. Simply incredible.

This T.E. Wealth blog dives deeper into both the Canadian and U.S. markets to show how a select few companies are truly driving stock returns.

PWL Capital’s Justin Bender gives us an excellent explanation of the expected future returns for Vanguard’s asset allocation ETFs. Hint, investors should lower their expectations:

On the other hand, Andrew Hallam explains how all-in-one portfolios proved their worth during Covid-19.

Morningstar’s Susan Dziubinski and Christine Benz discuss why young investors shouldn’t dabble in stocks. I get the idea of making mistakes early and chalking it up to a learning experience. But I’d rather young investors not lose money gambling on individual stocks and just get it right from the start with a broadly diversified indexing strategy.

Coronavirus is creating retirement insecurity. These 10 steps can defuse the time bomb of an ageing population.

The sandwich generation. Why adult children looking at supporting their parents need to consider the impact on their own financial goals.

One of the original personal finance bloggers, JD Roth gives us the true history of financial independence.

The Family Money Saver blog looks at why people don’t do F.I.R.E.

Steven Arnott, author of The Snowman’s Guide to Personal Finance, wrote an excellent case study on preparing for retirement.

A guest post on the My Own Advisor blog looks at whether you should only put 5% down on your mortgage and invest the difference.

Here’s why we won’t remember much of what we did in the pandemic:

“But I doubt I am alone in finding that my memory of the lockdown months is rather thin. No matter how many new people or old friends you talk to on Zoom or Skype, they all start to smear together because the physical context is monotonous: the conversations take place while one sits in the same chair, in the same room, staring at the same computer screen.”

Finally, a neat futuristic look at what the coronavirus will do to our offices and homes.

Have a great weekend, everyone!

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8 Comments

  1. Brien Stewart on August 29, 2020 at 1:39 pm

    Took the survey – my position is let inflation increase to get the economy moving.

    • Cam on August 29, 2020 at 3:17 pm

      Sure that works well when it is coupled with follow up wage increases for the workers and Canadians on fixed income getting full cost of living increments (very few get this). Otherwise increased inflation reduces standard of living. Heck my salary and many others at the business where we work haven’t had a wage increase in 4 years. So even when the economy was good employees were passed by. I look at the current food costs and call BS on the 2% the last 2 years.
      Heavy inflation will see me retreat to a defensive position and not spending on anything beyond subsistence. BUT who knows with the younger kids so comfortable with debt and multiple jobs on varying platforms.

  2. Dale T on August 29, 2020 at 2:18 pm

    Good luck if you believe that debt does matter at the country level..the debt myth.
    This is just people trying to justify spending beyond your means. Debt always has a price to be paid….pushing it to the future

  3. Deborah S. on August 29, 2020 at 4:54 pm

    Auto brokers, as described in the linked article, don’t seem to exist in Canada. Both Costco and the Auto Club provide auto buying services in the States, but not here. Sigh.

  4. Colin Haller on August 30, 2020 at 7:27 am

    I took the survey and pushed hard on a return to making full employment an important part of the mandate. The inflation obsession has been an abject failure.

    • Dean Ecclestone on September 1, 2020 at 2:53 pm

      I don’t understand your comment about it being a failure. My response to the survey was the exact opposite. Having lived through the crazy inflation of the 80’s, I never want to go back. The past 30 years of low inflation have coincided with one of the longest periods of prosperity. These short-sighted ideas about increasing inflation and running huge deficits (MMT: Magical Money Tree) will leave a mess for the next generation to clean up.

  5. Fausto on August 30, 2020 at 9:16 am

    I never had a salary increase. Change six time my job since 2005 to get better salary.

    I only buy things when they on sale with big discouns.

    Keep inflation low is very important for me

  6. Potato on August 30, 2020 at 11:06 pm

    I can see his point about brokers vs. car dealerships. Here in Canada, we have the APA for no-negotiation deals, an I think Costco offers its members some similar services.

    But for used cars, I was thinking it’s the golden age of the car dealership. I have to sell my dad’s cars, and how do you even do that in a pandemic? After 3 months, I finally took the dealer’s offer on one. They’ve got it listed for ~$9k more than they paid us for it, but what’s the alternative? If we could get half the spread selling privately, I would have done that in a heartbeat — and that was the plan, but when you can’t offer test drives, it just sits there in the driveway hoping a buyer will show up. And on the flip side, if I was looking for a used car, I think this would be a time I’d be more likely to go to a dealership over a private listing…

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