In this podcast episode, Andrew Smith, CPA, CA chats with Vivian Tse, director of communications at CPABC, on how inflation can affect your finances and on how you can weather this time of rising costs and interest rates. Part of our Coffee Chats with CPABC podcast series.
Canada’s inflation rate reached 6.8% as of April 2022, a huge jump compared to the 1.3% and 1.9% recorded in 2021 and 2020 respectively. This is also much higher than the Bank of Canada’s inflation control target, which is between 1.0 and 3.0%, as this range provides price stability. At 6.8%, the inflation rate implies that prices are unstable and for the average British Columbian, this means that the average cost of services and goods went up more than they did in those prior years.
Inflation also means that British Columbians are getting less for what they’re paying for and are saving less, which in turn lowers their standard of living, and those who will get hit the hardest by inflation are those on fixed incomes and lower wages. Nearly half of British Columbians are about $200 away from insolvency, and they are those who are already feeling the effects of inflation and rising rates on a daily basis.
With inflation, those with low wages and fixed income will see their purchasing power reduced even further, leaving them with even less money in their pocket for everyday essentials especially for irregular expenses. If someone is living beyond their means, they need to take a breath and stop and look at where they're spending their money and recognize where they're overspending and make changes in their spending habits to reduce their overall spending.
One way governments fight inflation is by raising interest rates. For several years, we’ve enjoyed record low interest rates, but as we have now witnessed, the Bank of Canada has started to raise interest rates, most recently hiking it by another 0.5% to 1.5%. Many economists are predicting the Bank of Canada will continue to do so into 2023 to slow down inflation. Interest rates increase will affect British Columbians in the short term by increasing the cost of borrowing. Additionally, British Columbians can expect to see higher interest rates on their loans and can expect to pay more on those interests.
Homeowners should not be overly concerned, but those with a variable mortgage may experience some longer term financial impact. With interest rates going up, it may increase the amount a homeowner with a variable mortgage will have to pay monthly towards their mortgage or extend their mortgage term. This, in turn, will lower the homeowner’s overall disposable income, which hampers their desire to spend and ultimately slows economic growth.
For prospective homebuyers, they're going to qualify for less than they did the year before, and with everything going up in price, they should have more money set aside for renovation, taxes, moving expenses, and furniture. In addition, prospective buyers should also consider how the stress test might affect what they can afford. Before they make any kind of offer, they need to ensure they can afford not only the mortgage, but also the property taxes, utility expenses, and other expenses that come with homeownership.
It's more than likely that our paycheques won't catch up with inflation, so it is important to look at our finances no matter what our income level is. To weather this period of inflation and rising interest rates, it would be wise to take stock of your current financial situation – outstanding debts and income sources, and build a budget to manage expenses. If financial situation permits, it’d also be important to set money aside for unexpected expenses, such as car repairs. And for those with debt, it may be time to review their situation to look for ways to better manage their debt.
Andrew Smith, CPA, CA, CIRP, LIT is a licensed insolvency trustee at Boale, Wood & Company in Surrey. Passionate about helping British Columbians deal with their financial situations, Smith is a CPA financial literacy volunteer. Visit CPABC’s FinLit site to bring a financial literacy session to your community.