Inflation and GDP: What You Need To Know About Economic Growth

What to know about inflation and GDP

To really understand where Canada is at economically, you need to look at two key stats: our inflation rate and our GDP (Gross Domestic Product). Here’s a quick crash course in these two important indicators and what they can mean for you.

The Impact Of Inflation

This is the sustained increase in costs of goods and services over time. Inflation explains why a chocolate bar cost 25 cents a few decades ago and well over a dollar today — over time, when there’s inflation, your money is worth less and less.

Deflation is when prices go down and the value of money increases. Hyperinflation is rapidly escalating inflation — often to the point of damaging an economy.

Nations measure their inflation rate as an annual percentage. Canada’s inflation rate was last recorded at 1.3 per cent in July. Between 1915 and 2013, Canada’s rate has averaged 3.22 per cent.

A healthy rate is considered between two and five  per cent. Ideally, inflation stays low and steady so things like wages and prices can gradually be adjusted and deflation — which is difficult to adjust for, particularly with wages — can cause an economy to become unstable.

There was a concern that the economic downturn might lead to deflation across North America. In Canada, there was deflation in mid-2009, but the rate has stabilized since and has fluctuated from between 0.4 per cent and 3.7 per cent since 2010.

Get A Grasp On Gross Domestic Product

Gross Domestic Product measures the value of all goods and services produced in a set area over a period of time. It can be stated as a number value, but is also often noted as percentage change from the previous period.

Canada’s GDP for 2012 was measured as US$1,821.40 billion. (FYI we produced just shy of 3 per cent of the value of the world’s economy.) Our GDP in 2012 was 1.8 per cent over 2011. From 1961 to 2013, our average growth rate was 0.82 per cent.

The ideal GDP is between two and four per cent. Such numbers indicate that an economy is growing. But when the numbers go beyond four per cent, it means some sectors (such as housing or tech stocks) are heading into a bubble and a correction and a dramatic drop in GDP is inevitable. As well, a bubble can trigger high inflation, which puts a strain on consumers.

How Are Current Inflation and GDP Levels?

According to these key indicators, the Canadian economy is on solid ground. We’re just below what economists currently define as ideal targets for these numbers, but we’re just shy of the mark and considering the world’s economy is still in recovery mode, the fact that prices are staying down and our economy is humming quietly is very good news.


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