Inflation 101 – what’s inflation and what does it mean for you?

Canada Life - May 05, 2022
Let’s take a look at some of the positive and negative aspects of inflation
Woman looking at prices at grocery store.

It’s not your imagination – a grocery budget that was once easy to stay within is no longer doing the trick. Why do your groceries suddenly cost more? And why are the prices of many other goods and services continuing to creep up? 

The answer is inflation.  

Understanding inflation is an important step in planning for your future.

Inflation is the gradual rise in prices for goods and services. With the rise in prices, your money can’t buy as much as it used to. Twenty years ago, you could buy two movie tickets for about $10. Today, $10 doesn’t even cover one ticket. Unfortunately, inflation does not simply apply to one product or service but is a general increase in prices.

Although spending a few extra dollars at the grocery store each month doesn’t seem overly concerning in the short term, when we consider the gradual increase in prices over years and decades, the impact – particularly on your financial planning – can be significant. This is especially true if your income doesn’t keep up with inflation.

What happens when inflation goes up?

Predicting inflation benefits everyone. A low and stable amount of inflation is actually good for your finances and the economy. When we anticipate what inflation will be, we can make appropriate budgets and financial plans. What is the right amount of inflation? What happens when inflation rises? 

Inflation doesn’t affect everything the same way. The cost of groceries may increase, but the value of your car or home may decrease. The effects of inflation are influenced by the type of inflation. The Bank of Canada sets an inflation target of 2% (with a target range of 1 to 3%). 

A gradual and managed inflation rate is important to support a thriving economy and economic growth. It encourages people to buy and spend now. If people put off purchasing waiting for prices to decrease, the result is deflation. Although deflation and paying lower prices for goods and services sounds great, the 2008 housing market crash in the United States is an example of how deflation can cripple an economy. In Canada, The Great Depression in the 1930s is another example of deflation.

What happens during times of high inflation?

High inflation is when the prices of goods and services are unusually high. When inflation rises, purchasing power declines and so can our standard of living. 

When inflation spirals out of control and rises quickly, the result is hyperinflation. Hyperinflation happens when prices rise by approximately 50% each month. The value of our dollar can’t keep up and the value of the currency is eroded – and in some cases nearly worthless. One of the greatest examples of hyperinflation was 1920s Germany – hyperinflation was so extreme that their currency was virtually worthless. German citizens were photographed wallpapering their homes with currency. 

Let’s take a look at some of the positive and negative aspects of inflation. 

Inflation pros and cons

Pro Con
Encourages spending – As people anticipate inflation, they spend now while prices are lower – consumer spending drives economic growth and can strengthen the economy. Erodes purchasing power – with inflation, we see a decrease in the purchasing power of currency due to an increase in prices. Your dollar will not buy as much as it once did. This is especially worrisome for people whose income doesn’t grow at the same speed as inflation.
  Inflation can make buying a home more challenging. The prices of homes will likely increase with the rate of inflation.
Encourages investing and planning for the future – inflation encourages you to invest your money so it can grow rather than tuck it away in a safe where its value will decrease as inflation rises. Variable interest rates increase with inflation – anyone holding debt with variable interest rates will likely see an increase in minimum payments as inflation increases. A fixed-rate mortgage is less impacted by inflation as your payment will be a fixed rate over a period of time.
  Can decrease the value of pensions. If a person’s pension has a fixed 2% yearly increase to their pension and inflation is higher than 2%, the value of their pension will decrease.


Inflation and retirement planning 

When planning for retirement, we have a goal in mind of what we would like to save. Your goal must continue rising to keep up with the higher cost of living. As time goes on, the amount you save will buy less. It’s important to save more than you think you’ll need – I can help you create a solid plan with inflation in mind.

How can you battle inflation? 

Slight inflation is a sign of a healthy economy, and with planning and investing, your dollar can grow and adapt with inflation. Let’s consider some simple steps to help protect the value of your money:

  • Invest your money so it can grow
  • Save more than you’ll need for retirement to account for inflation and rising cost of living
  • Start saving for retirement as soon as possible
  • Try to minimize variable debt (credit card debt and variable-rate mortgages) 

How can I help?

Let’s work together to make a plan that meets your needs and reflects current and future changes in the financial landscape.


Ask an advisor: What is inflation? – Canada Life

Learn about inflation and how it impacts your financial plan.



View video script


Description: This animated video introduces a character named Sarah and her advisor with illustrated graphics to explain inflation.

Text: Ask an advisor: What is inflation?

Description: An illustration of a bar graph with an upwards arrow draws into the frame.

Sarah: I’ve been hearing a lot about inflation. Should I be worried?

Description: Sarah sits in the advisor’s office. The advisor nods his head and smiles. His laptop sits on the desk between them.

Advisor: One of the best reasons to have a financial plan is to help you manage inflation.

Description: Cut to a medium shot of the advisor gesturing with his hands.

Advisor: Inflation is the gradual rise in the prices for all the goods and services you buy,

Description: A stack of coins is shown. Two coins roll into the frame and are added to the stack.

Advisor: including groceries, transportation and maybe your spring break vacation.

Description: Illustrations appear: a paper bag of food for groceries, a gas pump for transportation and an airplane for vacation.

Advisor: While we hope prices won’t go up, some inflation is the sign of a growing, thriving economy.

Description: A coin from the stack starts to roll along a line. The coin continues to roll as the line grows to a peak and then dips downward. Text “1-3% per year” appears onscreen.

Advisor: That’s because it encourages consumers to spend money now, rather than later when the price could be higher.

Description: More coins fall into the frame.

Advisor: But inflation can be a problem if your pay cheque can’t keep up.

Description: The camera pans downward to large text that compares a “1% raise” to “3% inflation.” A hand holding a pay cheque moves into the frame.

Advisor: Over time, you may not be able to afford to purchase as much as you previously did, lowering your standard of living.

Description: The illustrations of groceries, transportation and vacation return. Dollar signs flow outwards from each.

Advisor: This is especially important in retirement when your income may be more fixed and not able to grow with inflation.

Description: A graph appears. A straight dotted line labelled “Fixed income” draws into the frame. A second line draws in an upward motion, showing rising inflation.

Sarah: Oh, that makes sense!

Description: The camera zooms out of the graph to reveal the advisor’s laptop and Sarah in his office.

Advisor: Let’s talk about how you can create a financial plan with inflation in mind.

Description: The advisor gestures towards his screen, Sarah smiles.

Text “Let’s talk. Contact me today.” appears onscreen with the Canada Life logo and legal line: “Canada Life and design are trademarks of The Canada Life Assurance Company. 1-204-946-1190.”

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.

Canada Life and design are trademarks of The Canada Life Assurance Company.