Inflation is coming: Signs that everything is about to get much more expensive


Inflation could be on track to hit 5 per cent; meaning each of these loses a nickel in value every year. PHOTO BY SHANNON VANRAES / BLOOMBERG

If you haven’t noticed, the price of virtually everything is skyrocketing

The value of a dollar goes down, so you need more of them to buy a Big Mac . So it’s very reasonable to assume that if your dollar suddenly can’t buy you nearly as much as it used to, then it might have begun to devalue. To be sure, the Consumer Price Index, Canada’s usual metric for inflation, isn’t showing that anything too weird is happening. Most notably, the index can’t account for changes in consumer behaviour, such as whether rising beef prices have driven Canadians to eat chicken — the index would just conclude they’re spending more on beef.

COVID-19 dropped a bomb on our usual understanding of consumer behaviour, spurring endless weird anomalies like a steep rise in alcohol sales, a boom in home baking and a run on sex toys, among others.

Governments have been utterly blowing out their spending

In the current financial year, Canada is running up a deficit that could have singularly paid for the country’s entire contribution to the Second World War. In November, a CIBC analysis found that Canadians were sitting on more than $90 billion in excess cash, which is not behaviour typical of a population in dire economic straits. While COVID-19 was devastating to those in the tourism and hospitality sectors, it left other areas of the economy relatively unscathed. If the federal government sent every single Canadian a parrot they didn’t need, you can expect that the price of parrots would plummet overnight.

A mountain of stashed-away money is about to be unleashed on the economy

Economist Ian Lee, an associate professor at Carleton University, has been warning about a coming tide of inflation since well before COVID-19 sent the Canadian economy into conniptions. Just as with all the government money blowing around, this glut of Boomer cash is similarly poised to bring down the value of the dollar generally.

Bond yields are going up

In the case of government debt, you shell out $10,000 for a Guaranteed Investment Certificate , and Ottawa agrees to pay you back after a fixed period of time with interest. Unlike regular interest rates , bond interest rates will freely go up or down depending on what investors are willing to accept. S. . This means that investors aren’t as willing to buy bonds as they once were, so the government needs to sweeten the deal with a higher return.

If you buy a $10,000 bond and inflation hits five per cent, you’re going to automatically lose $500 per year just by virtue of having parked your money instead of spending it. In this scenario, it’s natural that investors would demand a higher price for parking that cash.

Source: Tristin Hopper | NP

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