But at times big increases do happen, reducing our purchasing power and leaving us worried about our finances. To ease those worries, we’re sharing three strategies you can use to combat inflation. First, it’s important to understand why it happens and how it’s tracked.
How does inflation work?
There are various factors that influence inflation, but let’s take a quick look at two of the key drivers:
- Demand-Pull Effect – When demand for products and services outpaces supply, their prices tend to increase because people are willing to pay more for them.
- Cost-Push Effect – When the cost to produce a product increases (for example, because its raw materials become more expensive), the price of the final product will typically rise as well.
Short-term price shifts are rarely cause for concern. But when these effects occur to a lot of different products at the same time over an extended period, the result is high inflation.
How is inflation measured?
The Consumer Price Index (CPI) is the official measure of inflation in Canada. You can think of it as a virtual shopping basket that Statistics Canada fills with around 700 products and services Canadians typically buy. These cover a variety of categories:
- Household expenses, furniture & appliances
- Medical & personal care
- Recreation, education & leisure
- Alcohol, tobacco & recreational cannabis
They then add up the total cost every month and track the change in prices.
3 ways to protect your finances from high inflation
- Reduce or consolidate debt
During high inflation, your money doesn’t stretch as far. So it’s important to plug as many financial leaks as possible to limit strain on your finances. The biggest of these leaks is debt, particularly high interest debt. By prioritizing reducing debt, you free up funds that would otherwise have gone towards interest payments.
Let’s look at a credit card charging 19% interest with a balance of $5,000: