{"id":57897,"date":"2022-05-31T20:36:00","date_gmt":"2022-05-31T20:36:00","guid":{"rendered":"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/understanding-inflation-how-it-works-and-what-you-need-to-know\/"},"modified":"2024-02-12T14:48:50","modified_gmt":"2024-02-12T19:48:50","slug":"understanding-inflation-how-it-works-and-what-you-need-to-know","status":"publish","type":"rbc_my_money_matter","link":"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/inspired-investor\/investing-academy\/understanding-inflation-how-it-works-and-what-you-need-to-know\/","title":{"rendered":"How Inflation Works and What Investors Need to Know"},"content":{"rendered":"<div class=\"wp-block-rbc-single-article-header\">\n\t<section class=\"section-grey cover pad-t-hlf\">\n\t\t<div class=\"section-inner w-half w-mob-full centered-margin cover section-grey pad-tb-0\">\n\t\t\t\t\t\t\t<div class=\"inline-block pill-container pill-taxonomies\">\n\t\t\t\t\t<div class=\"mar-b-hlf mob-mar-b snipe pill is-style-blue-pill\">\n\t\t\t\t\t\t<a class=\"primary-taxonomy\" href=\"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/topic\/inflation\/\">\n\t\t\t\t\t\t\t<span>Inflation<\/span>\n\t\t\t\t\t\t<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t<h1 class=\"mar-b-hlf mar-t-0 mob-pad-lr-hlf h2 has-black-color\">How Inflation Works and What Investors Need to Know<\/h1><p class=\"mar-b-0 mob-pad-lr-hlf author-text\">By RBC<\/p>\t\t\t\t\t<div class=\"featured-image-wrapper pos-rel\">\n\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"930\" height=\"620\" src=\"https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2023\/09\/TD-97-1.jpg?quality=80\" class=\" cover-image  wp-post-image\" alt=\"Baskets of food balanced over piles of coins.\" srcset=\"https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2023\/09\/TD-97-1.jpg 930w, https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2023\/09\/TD-97-1.jpg?resize=300,200 300w, https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2023\/09\/TD-97-1.jpg?resize=768,512 768w\" sizes=\"auto, (max-width: 930px) 100vw, 930px\" \/>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t<\/section>\n\t<div class=\"article mar-t-dbl\">\n\t\t\t\t<section>\n\t\t\t<div class=\"section-inner socials-section\">\n\t\t\t\t<div class=\"top-socials-bar mob-mar-b-hlf\">    <div class=\"social-links mob-mar-b-hlf mob-mar-t-hlf\">\n            <a class=\"social-button-wrapper sharing-custom sharing-email\" href=\"mailto:?subject=How Inflation Works and What Investors Need to Know &#038;body=Hi, I thought you might be interested in this article from RBC My Money Matters: https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/inspired-investor\/investing-academy\/understanding-inflation-how-it-works-and-what-you-need-to-know\/\">\n        <img decoding=\"async\" src=\"https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/plugins\/rbc-blocks\/assets\/img\/icons\/icon-email.svg\"\n          alt=\"envelope icon\">\n        <span>\n          Email        <\/span>\n      <\/a>\n      <div class=\"social-button-wrapper sharing-copy-wrapper\">\n        <button class=\"sharing-custom sharing-copy\" data-url=\"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/inspired-investor\/investing-academy\/understanding-inflation-how-it-works-and-what-you-need-to-know\/\">\n          <img decoding=\"async\"\n            src=\"https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/plugins\/rbc-blocks\/assets\/img\/icons\/icon-related.svg\"\n            alt=\"copy icon\">\n          <span id=\"sharing-copyUrl-Label\">\n            Copy URL          <\/span>\n        <\/button>\n        <input type=\"text\" class=\"sharing-copy-text\" aria-labelledby=\"sharing-copyUrl-Label\">\n      <\/div>\n    <\/div>\n  <\/div>\n\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section>\n\t\t\t<div class=\"section-inner w-half w-mob-full centered-margin pad-tb-0 mob-mar-t-hlf mob-mar-b\">\n\t\t\t\t<p class=\"cover-pub-line text-xs mar-b-hlf\">Published May 31, 2022 \u2022 5 Min Read<\/p>\t\t\t<\/div>\n\t\t<\/section>\n\t<\/div>\n<\/div>\n\n\n\n<section class=\"wp-block-rbc-section-block  pos-rel\" style=\"border-radius:0px\">\n<div class=\"wp-block-rbc-section-inner-block  section-inner w-half w-mob-full\" style=\"border-radius:0x\">\n<p><i>This article was&nbsp;<a href=\"https:\/\/www.rbcgam.com\/en\/ca\/learn-plan\/investment-basics\/understanding-inflation\/detail\" target=\"_blank\" rel=\"noopener\"><em>originally published<\/em><\/a>&nbsp;by RBC Global Asset Management.<\/i><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Key takeaways<\/h2>\n\n\n\n<ul class=\"wp-block-rbc-list default is-style-blue-disc\">\n<li class=\"wp-block-rbc-list-item\">\n<p class=\"is-style-default default\">Inflation represents the gradual rise in prices over time. It results in a decrease in purchasing power.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>A diversified portfolio of equities and bonds can help mitigate inflation risk.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Companies&#8217; revenues and earnings typically outpace inflation over time. Bonds can provide stability against equity market volatility.<\/p>\n<\/li>\n<\/ul>\n\n\n\n<p>Whether you&#8217;re saving for education, retirement or another long-term goal, it&#8217;s important to be aware of inflation risk \u2013 that is, the risk that inflation will erode the value of your investments over the long term. Here&#8217;s a guide to understanding the forces behind inflation, and how diversification can help you protect the value of your money.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">What is inflation?<\/h3>\n\n\n\n<p>Simply put, inflation is the increase in prices over time. The inflation rate measures how prices have changed over a period of time.<\/p>\n\n\n\n<p>As inflation rises, your <a href=\"https:\/\/www.rbcgam.com\/en\/ca\/learn-plan\/investment-basics\/how-to-stay-ahead-of-inflation\/detail\" target=\"_blank\" rel=\"noopener\">purchasing power<\/a> decreases. This means that your money does not go as far or buy as many things as it did before prices rose. Inflation impacts all aspects of the economy \u2013 from consumer spending and business investments, to government policies and interest rates.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2023\/08\/dozeneggs-inflation-13.png\" alt=\"cost of 12 eggs\" class=\"wp-image-40350\" \/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\">How is inflation measured?<\/h3>\n\n\n\n<p>Governments use various measures to keep tabs on the economy and implement policy decisions. One of the most commonly cited measurements by many countries is the Consumer Price Index (CPI). The CPI is usually presented as a simple number. However, a lot of work goes into compiling it.<\/p>\n\n\n\n<ul class=\"wp-block-rbc-list default is-style-blue-disc\">\n<li class=\"wp-block-rbc-list-item\">\n<p class=\"is-style-default default\">In the U.S., the CPI is based on a basket of 80,000 items in more than 200 product categories across eight major groups.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>To keep the basket up to date, 24,000 families are interviewed every two years for insights on what they actually buy. An additional 12,000 families keep diaries on their spending habits.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Every month, the prices of the 80,000 items are recorded. The average overall price levels are then reported as the CPI. This is used to calculate the annual and monthly rates of inflation.<\/p>\n<\/li>\n<\/ul>\n\n\n\n<p>The index began at a baseline level of 100 in 1982. When the CPI reached 200 in April 2006, it signified a 100 per cent increase in overall prices since the early 80&#8217;s. By June 2021, that figure was closer to 172 per cent.<\/p>\n\n\n\n<p>Other commonly cited measurements of inflation you may hear about include:<\/p>\n\n\n\n<ul class=\"wp-block-rbc-list default is-style-blue-disc\">\n<li class=\"wp-block-rbc-list-item\">\n<p class=\"is-style-default default\"><strong>Core inflation&nbsp;<\/strong>is CPI minus the more volatile price categories (i.e. food and energy).<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p><strong>Personal Consumption Expenditures Price Index (PCE)&nbsp;<\/strong>accounts for changes in consumer preferences. Sometimes, people move away from some goods and services towards others. For instance, if the price of chicken rises unexpectedly, consumers may buy pork. PCE is the U.S. Federal Reserve\u2019s preferred measure.<\/p>\n<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">What causes inflation?<\/h3>\n\n\n\n<ul class=\"wp-block-rbc-list default is-style-blue-disc\">\n<li class=\"wp-block-rbc-list-item\">\n<p class=\"is-style-default default\">There are two main theories:&nbsp;<strong>Cost-push theory<\/strong>&nbsp;states when the cost of labour and materials (and really anything that\u2019s required to get products onto shelves) rises, this drives up the price of goods and services.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p><strong>Demand-pull theory&nbsp;<\/strong>suggests inflation rises when consumers have money and want to spend, but there are not enough goods for purchase. In this case, it\u2019s not the raw materials that cause the increase in prices. It\u2019s the demand for the finished product.<\/p>\n<\/li>\n<\/ul>\n\n\n\n<p>From an economic perspective, cost-push forces can be a greater concern. They indicate problems in the supply of goods and services. Demand-pull forces are more positive, as they occur when the average person has more money to spend. Higher demand feeds into higher prices \u2013 a sign of a strong, expanding economy.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Why is inflation a problem?<\/h3>\n\n\n\n<p>Traditionally, a moderate level of inflation (around two per cent) is considered a positive signal. This is because it&#8217;s associated with economic growth. Higher levels of inflation are often perceived as a negative signal \u2013 suggesting the economy may be overheated. This can lead to an economic downturn, with some businesses suffering more than others. Inflationary pressures can drive higher prices. And if prices are rising faster than wages, then real incomes will drop. Inflation can also drive more government spending, as it costs more to run the same programs.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">How can you protect your portfolio from the effects of higher inflation?<\/h4>\n\n\n\n<p>Inflation can affect some asset classes more than others. When inflation rises and market conditions change, it&#8217;s important to closely monitor the asset mix of your portfolio.<\/p>\n\n\n\n<p><strong>Equities<\/strong> tend to offer better protection against inflation. Company revenues, and therefore earnings, can outpace inflation over time. Over the last 20 years, equities have delivered returns approximately 6% higher than inflation.4<\/p>\n\n\n\n<p><a href=\"https:\/\/www.rbcgam.com\/en\/ca\/learn-plan\/investment-basics\/why-its-important-to-diversify\/detail\">Diversification is key<\/a>. For example, it can help to add exposure to companies with ties to commodities, real estate, or those with the ability to pass on price increases to their customers without impacting demand.<\/p>\n\n\n\n<p><strong>Fixed income<\/strong> investors are often enticed by the stable stream of income bonds provide. However, inflation and interest rates tend to move in the opposite direction from bond prices. When interest rates rise, it can reduce the value of your bond holdings.<\/p>\n\n\n\n<p>While inflation may impact areas of the bond market in the near term, bonds play an important role in diversified portfolios by providing stability against equity market volatility. Consider bonds with a variety of characteristics including: maturity, various risk levels, as well as sovereign and corporate bonds, both domestic and global.<\/p>\n\n\n\n<p>If you start to see the impact of inflation on your portfolio, remember: balance is everything.<\/p>\n\n\n\n<ul class=\"wp-block-rbc-list default is-style-blue-disc\">\n<li class=\"wp-block-rbc-list-item\">\n<p class=\"is-style-default default\">If the portion of equities in your portfolio increases, you may experience more volatility. So keep your\u00a0<a href=\"https:\/\/www.rbcgam.com\/en\/ca\/learn-plan\/investment-basics\/how-do-you-think-about-risk-as-an-investor\/detail\" class=\"rbc-link-format\">risk tolerance<\/a>\u00a0in mind when considering any changes to your portfolio.<\/p>\n<\/li>\n\n\n\n<li class=\"wp-block-rbc-list-item\">\n<p>Fixed income will continue to play an important role within a diversified balanced portfolio. It can help create a smoother investment experience and help you stick to your investment plan.&nbsp;<a href=\"https:\/\/www.rbcgam.com\/en\/ca\/learn-plan\/investment-strategies\/understanding-the-bond-market\/detail\">Explore different parts of the bond market now<\/a>.<\/p>\n<\/li>\n<\/ul>\n\n\n\n<p>Inflation is just one of the many economic forces that can affect your investments. The key is to choose investments carefully, with strategies to address inflation.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<div class=\"wp-block-rbc-rbc-default-collapsible\"><p><button class=\"collapse-toggle collapsed\" data-target=\"#collapse834a1009\" data-toggle=\"collapse\" aria-expanded=\"false\" aria-controls=\"collapse834a1009\" data-dig-id=\"LP-57738-834a1009\" data-dig-category=\"LP\" data-dig-action=\"accordion closed\" action-closed=\"accordion closed\" action-opened=\"accordion open\" data-dig-label=\"Things our lawyers want you to know\"><span>Things our lawyers want you to know<\/span><span>Things our lawyers want you to know<\/span><\/button><\/p><div class=\"collapse-content collapse\" id=\"collapse834a1009\">\n<div class=\"wp-block-rbc-collapsible-inner-block collapse-inner\">\n<p>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.<\/p>\n<\/div>\n<\/div><\/div>\n\n\n\t\n\t<div class=\"wp-block-tk-spacer id-79858560-f9f7-4901-b440-fec514ef80eb\" aria-hidden=\"true\"><\/div>\n\t\n\n\n<p class=\"has-text-align-center h5 mar-b\"><strong>Share This Article<\/strong><\/p>\n\n\n\n\t\t<div class=\"socials-block\">\n\t\t\t    <div class=\"social-links mob-mar-b-hlf mob-mar-t-hlf\">\n            <a class=\"social-button-wrapper sharing-custom sharing-email\" href=\"mailto:?subject=How Inflation Works and What Investors Need to Know &#038;body=Hi, I thought you might be interested in this article from RBC My Money Matters: https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/inspired-investor\/investing-academy\/understanding-inflation-how-it-works-and-what-you-need-to-know\/\">\n        <img decoding=\"async\" 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class=\"wp-block-tk-spacer id-b676ce58-b9ca-4aec-8d4b-b4b6df2df91f\" aria-hidden=\"true\"><\/div>\n\t\n\n\n\t\t\t<div class=\"wp-block-rbc-single-post-topics related-topics-links\">\n\t\t\t\t<p class=\"h5 mar-r-hlf\">Topics:<\/p>\n\t\t\t\t\t\t\t\t\t<a href=\"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/topic\/inflation\/\" class=\"btn topic mar-t-0 mar-r-qtr mar-b-hlf\">Inflation<\/a>\n\t\t\t\t\t\t\t\t\t<a href=\"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/topic\/rrsp\/\" class=\"btn topic mar-t-0 mar-r-qtr mar-b-hlf\">RRSP<\/a>\n\t\t\t\t\t\t\t\t\t<a href=\"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/topic\/savings\/\" class=\"btn topic mar-t-0 mar-r-qtr mar-b-hlf\">Savings<\/a>\n\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n<\/section>\n\n\n\n<section class=\"wp-block-rbc-section-block  pos-rel mob-pad-t-dbl\" style=\"border-radius:0px\">\n<div class=\"wp-block-rbc-section-inner-block  section-inner\" style=\"border-radius:0x\">\n<h2 class=\"wp-block-heading mar-b mob-mar-b-dbl mar-t-0\" id=\"h-read-this-next\">Read This Next<\/h2>\n\n\n\t\t\t<div class=\"related-posts-type-2\">\n\t\t\t\t<div class=\"related-post-list\">\n\t\t\t\t\t<ul class=\"grid-wpr eh-wpr\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<li class= 'grid-one-third grid-tb-full grid-mob-full mar-b'>\n\t\t\t\t\t\t\t\t\t\t<article class=\"col-wpr mar-b-0 mar-r-0 mar-l-0\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"postcard-img-ctr post-card-image col-md-12 col-xs-6 mob-mar-b-0 pad-l-0\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"930\" height=\"620\" src=\"https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2023\/09\/TDD-2.jpg?quality=80&amp;w=930\" class=\"attachment-post-thumbnail size-post-thumbnail wp-post-image\" alt=\"Young man working at a desk with a laptop and looking at a paper desk calendar.\" 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src=\"https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2025\/01\/2025-financial-roadmap-shutterstock_2375988879.jpg?quality=80&amp;w=1024\" class=\"attachment-post-thumbnail size-post-thumbnail wp-post-image\" alt=\"Digital form checklist\" srcset=\"https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2025\/01\/2025-financial-roadmap-shutterstock_2375988879.jpg 6736w, https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2025\/01\/2025-financial-roadmap-shutterstock_2375988879.jpg?resize=300,197 300w, https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2025\/01\/2025-financial-roadmap-shutterstock_2375988879.jpg?resize=768,505 768w, https:\/\/www.rbcroyalbank.com\/en-ca\/wp-content\/uploads\/sites\/12\/2025\/01\/2025-financial-roadmap-shutterstock_2375988879.jpg?resize=1024,673 1024w, 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mar-t-0\">2026 Financial Roadmap: A Guide to Debt, Budgeting and Investing in Canada<\/a>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<\/article>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t\t\t\t\t<\/ul>\n\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n<\/section>\n<style class=\"advgb-styles-renderer\">\n\t\t.wp-block-tk-spacer.id-79858560-f9f7-4901-b440-fec514ef80eb {\n\t\theight: 96px;\n\t}\n\n\t@media ( max-width: 480px ) {\n\t\t.wp-block-tk-spacer.id-79858560-f9f7-4901-b440-fec514ef80eb {\n\t\t\theight: 30px;\n\t\t}\n\t}\t\n\t\t.wp-block-tk-spacer.id-b676ce58-b9ca-4aec-8d4b-b4b6df2df91f {\n\t\theight: 60px;\n\t}\n\n\t@media ( max-width: 480px ) {\n\t\t.wp-block-tk-spacer.id-b676ce58-b9ca-4aec-8d4b-b4b6df2df91f {\n\t\t\theight: 30px;\n\t\t}\n\t}\t<\/style>","protected":false},"excerpt":{"rendered":"<p>Whatever your financial goals are, it&#8217;s important to understand how inflation will affect the value of your investments over the long 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