When I was a little girl, inflation was the big economic news of the day. It was the 1970s and inflation was sky high across North America.
Inflation is basically an increase in the price of goods and services. Economists like to keep inflation at about 2-3%. That means something you buy in one year for a dollar will, at least in theory, cost $1.02 a year later.
We want some inflation because it indicates that the economy is growing. But too much, like in the 70s and early 80s, puts a major cramp on the economy. Consumers suddenly can’t afford things, especially big-ticket items like houses and cars. Businesses can’t afford to buy things either, with consumers shying away from their products or services because of prices and uncertainty.
Meanwhile, over the years, high inflation can erode your savings accounts. In particular, people saving for retirement need to take inflation into account when calculating how much they need to save for their non-working years.
Why talk inflation now? Because interest rates are dead low, and have been for a few years, but The Bank of Canada will raise those rates if inflation starts to climb. That’s because raising interest rates, which puts a cap on how much money is circulating in the economy, helps curb inflation.
And that is exactly what happened in the 1980s. After years of out of control inflation, interest rates started to spike in North America. That licked inflation, but also made it incredibly hard for families to pay their mortgages, particularly when rates hit 20%.
One reason the Bank did not raise interest rates this week is inflation has been hovering around 2.2%, which is ideal for economists. The Bank of Canada stated, with its interest rate announcement earlier this week, that inflation is in check, thanks partly to the high state of the Canadian dollar. By keeping interest rates as they are, at least for now, the bank believes it’s keeping a fine balance between inflation, money, and the growth of the economy.
What do you truly need to know about inflation? That the economic errors of the past are informing what economists do today. The Bank of Canada can’t control the economy with its policies, but it can help things move along smoothly by tinkering with the amount of money in circulation and interest rates. It’s not an exact science, but it’s one that our government uses to try to make the economy hum along so you and I can live as well as possible.
Writer for RateSupermarket.ca