Inflation!

Canada’s inflation rate is currently at 6.9% year over year, as of October 2022. Everyone has been talking about the consumer price index, interest rates, monetary policy, financial outlook, and the federal reserve. But how does all this impact the average Canadian?

Inflation is the rise in prices over time. This occurs due to a number of factors, the largest being an increase to the supply of money. This happens when governments ‘print’ money, adding it to the economy. Annual inflation in Canada is normally a healthy 2%.

The rise of prices over time can be translated as a weakening of purchasing power of time. This means that $100 today can be expected to be less valuable in the future, as prices have risen. Everyone has a memory of things being cheaper when they were kids!

So what does this mean for your portfolio? How can this effect your retirement? Inflation needs to be planned for. When working on a financial plan, investors need to be aware of the weakening of their purchasing power. When discussing income in retirement, a 2% or 3% annual inflation should be baked into an investors projections. This can be represented by using a lower rate of return.

There is not much an investor can do to protect their portfolio from the effects of inflation. Some investors think that gold or cryptocurrency can be a hedge against inflation, but these have both been proven to not be true. The best hedge against inflation are stocks. The rise of stock prices is generally inclusive of the effects of inflation. There are some special financial instruments that can be linked to inflation, however the trade-off is that these tools generally limit their upside.

Inflation impacts everyone, and it’s not going anywhere. Investors need to make sure that their portfolio is properly position to weather the effects of inflation, and that inflation is considered when projecting a portfolio. Make sure you are in a good position by contacting Stride Business Works today!

Dale Hein, CA, CPA

Alex Hein, CFP