Vincent Black

Inflation is on the rise…

MILENIO STADIUM - INFLATION - RISE

 

 

In recent months, most dinner conversations with my wife are about how expensive the groceries are. She just paid for strawberries that were three dollars a basket that is double from a previous cost and to boot, not as fresh. We discuss how much the increases have become and l just do not have the heart to cut her off because she is right. I am sure that most of you face the same dilemma and are finding it more and more difficult to keep up with the with the uncertain cost increases.

So, why is this happening and who is to blame?
Why are we paying double and getting less?

Both good questions and l will try to give you my reasoning together why this is happening.

Most residents can’t keep up with climbing prices for most items, around 70 per cent are seriously stressing about their money situation and nearly 75 per cent say they can no longer afford transportation, food, housing and clothing, and have had to seriously adjust their spending habits. The prices of food and gas in particular have been hurting people’s wallets the most as we hit a 40 year-inflation high this year with wages not keeping pace.
We keep hearing this word inflation bandied about by the media and during most conversations, this word keeps coming up with no real meaning behind it and l believe most folks still do not know the meaning of this word, its effects on the economy and our everyday lives.

Inflation is when prices for goods and services rise and purchasing power falls. When inflation goes up, people and businesses have to spend more money to buy the same amount of goods and services. Put simply, everything becomes more expensive. It’s also important to note that the term “inflation” is reserved for instances where a rise in prices is a sustained trend rather than a fluctuation. As well when measuring the rate of inflation, economists in Canada use the Consumer Price Index (CPI). The CPI looks at a basket of goods and services that roughly represents what the average consumer purchases. Statistics Canada updates what this basket contains every two years, so the measure continues to reflect how Canadians are spending their money.

What causes inflation?

Prices rise when demand in the economy outpaces supply. There are many theories about how this can occur, but fundamentally, something would have to trigger a disruption to supply or a boost in demand in the economy. Supply chain issues, such as what has been experienced throughout the pandemic, can lead to prices rising. In the case of the pandemic, demand for goods and services rebounded faster than supply and businesses tried to catch up amid a labor shortage and logistical problems, costs rose.

Inflation can eat away at people’s budgets, especially without a pay raise. If employees are in a situation where they can negotiate their wages, you’d expect wages to at least keep up with inflation. If your wage remains constant and prices increase five per cent, then it’s as if you’re being paid less. However, what economists particularly worry about is unexpected inflation, which throws off future financial planning. Without a stable inflation rate, planning future investments and purchases becomes difficult for both people and businesses.
Controlling inflation is the responsibility of a country’s central bank – the institution responsible for managing money supply. In Canada, the Bank of Canada is legally mandated to promote the economic and financial welfare of Canada. The Bank of Canada has two tools at its disposal to maintain its target inflation rate.

During an economic downturn, the bank can buy government bonds and other financial assets to drive up the price of these assets and thereby lowering the interest rate bondholders receive. This tool is called quantitative easing. Lowering this interest rate influences other interest rates that impact consumers and businesses, making it cheaper to borrow and spend. When the economy is on track and inflation reaches its target, the bank sells off the bonds.

The second tactic is changing the interest rate the bank charges commercial banks, called the target overnight rate. The bank can lower interest rates to boost spending. As the economy rebounds, the bank will raise interest rates again to avoid excessive inflation. These are just a small sampling of what most governments in conjunction with banks can do, however, sometimes these situations need to come full circle. The biggest problem is that the time these cycles play out, people’s fortunes and savings are wiped out along with high interest rates that have many not able to service a debt.

Therefore, when my wife keeps talking about rising prices and its effects on our household during dinner, my response to her is “what’s for dinner tomorrow?”… not trying to avoid the topic of which she is right about, but we need to put some sense to the topic because the alternative is not good.
Looks like inflation could be the buzz word for quite some time!

Vincent Black/MS

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