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Budget Busters — The Impact of Inflation on Everyday Life

By Amanda Reaume

Published July 14, 2023 • 3 Min Read

With higher housing, transportation costs and food prices, many Canadians feel the effects of inflation each time they open their wallets. While you can’t control the economy, the tips below can help you understand inflation and help your finances while prices remain high.

According to Statistics Canada, inflation is a continuous increase in the average price for goods and services measured by the Consumer Price Index. CPI is calculated by monitoring the average price change for a fixed group of goods and services over a period of time.

Consumers often hear about how inflation impacts the larger economy, but it impacts individuals and families in several ways. Here’s how:

1. Increased cost of living

With inflation driving prices up, the cost of basic necessities such as food, housing, utilities and healthcare may also rise, increasing the overall cost of living. When the price of goods continues to rise over time, individuals may require more money to maintain the same standard of living, which can strain established budgets.

2. Reduced purchasing power

As inflation causes the price of goods and services to increase, the ability to stretch the same dollar is diminished. In short, the same amount of money buys fewer goods and services, thereby diminishing overall purchasing power.

3. Higher borrowing costs

Inflation often results in rising interest rates, impacting loans and mortgages. That’s one reason why people borrow more money when rates are low. New mortgages as well as variable rate mortgages, for example, may cost borrowers more over the term of their loan in interest.

4. Uncertainty

Economic uncertainty can make it difficult for individuals to budget or predict what things will cost in the future. Imagine saving for a big purchase, only to reach your financial goal and learn that the price has increased significantly, and your savings can no longer cover it.

At the end of the day, consumers can’t control what happens with inflation rates, but they can control how to respond to it. Below are a few ways to help you navigate the inflationary storm.

5. Budget and prioritize

Creating a budget is a sound financial strategy no matter what the economy is doing, but even more important during inflationary times. Having a clear picture of your current financial situation and your essential versus discretionary spending helps prioritize what your family needs over what your family wants. For example, when prices increase, many families postpone big vacations or repair appliances instead of replacing them.

6. Diversify investments

Diversifying portfolios is one of the most common strategies to hedge against investment risks. The same strategy can apply to inflation. If you’re concerned about the effects inflation may have on your savings, by diversifying your investments, you’ll spread your funds across different kinds of assets.

7. Increase income

Since the ability to purchase goods and services may diminish with inflation, to counter it, consider exploring alternative sources of income, such as freelancing or a part-time job, to help buffer the impact of rising prices.

Because of inflation, one’s dollar can no longer stretch the way it once did. As a result, individuals find themselves financially stretched, with less disposable income at the end of the month. Learning how inflation can impact you individually, and steps to help lessen the impact of rising prices, in an important first step to weathering the storm and feeling more financially secure.

While you can’t control the economy, you can control how you budget everyday life and where you save your money. Following the tips above can help your finances while prices remain high.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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