Talk of rising inflation, interest rates, and a resulting recession have been dominating the financial headlines lately, and with good reason. Rising costs aren’t good for the growing number of Canadians (35%) who are under increasing financial stress. [Canada.ca]
Before you reach for a bottle of Moira Rosé, let’s review how inflation and interest rates work together, and what you can do about it.
Let’s start at the beginning.
Inflation is the gradual, broad increase in prices of goods and services. It’s usually talked about as a percentage that represents the rate at which prices have risen over the last year.
Interest rates are a used as a tool to help get inflation under control. High rates cause people and businesses to spend less, thereby reducing demand for products and services. As demand falls, the rate of inflation should fall with it.
So, are we in a recession?
While we’re currently experiencing high inflation rates, and are feeling the pinch of rising costs, we’re not technically in a recession… yet. A recession is a period of temporary economic decline during which trade and industrial activity are reduced. It’s typically identified by a fall in GDP (Gross Domestic Product) in two successive quarters. According to Forbes.com, decreased consumer spending, increased business costs, reduced lending, and stock market declines can all cause recessions. As costs continue to rise faster than incomes, Canadian economists have warned that we could enter into a recession period early next year [CTV News].
What can I do?
This is a great to time take a look at your finances and understand exactly where your money is going. If needed, identify areas that make sense for you to cut back. You don’t need to skip your morning latte if it’s an important part of your self-care routine, but see if you can set aside a few dollars to grow your emergency fund, or pay down high interest debt.