A four-alarm warning about inflation’s impact on your finances

James Britton CFP, CLU, EPC profile photo

James Britton CFP, CLU, EPC

Financial Planner
Britton Wealth Management and Planning Consultants Inc.
Fax : 866-202-2935
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The most ominous thing about inflation is not that living costs were up by a three-decade high of 6.7 per cent last month.

Scarier is the fact that inflation is gaining velocity. The year-over-year inflation rate was 4.8 per cent in December, 5.1 per cent in January and 5.7 per cent in February. Inflation has been on the rise for more than a year now, but we have never seen a month-to-month jump like we did in March compared with the previous month.

Let’s look at four challenges for your finances caused by the worsening inflation problem:

Interest rates are going up more than expected:

The surprisingly high inflation rate in March adds to urgency for the Bank of Canada to act decisively to cool inflation. This raises the likelihood of harder, faster rate increases. The central bank’s benchmark overnight rate has already increased by 0.75 of a percentage point this year. Expect another jump of 0.5 of a point on June 1, and more increases over the second half of the year. Lines of credit, floating rate loans and variable rate mortgages will get considerably most expensive. Some good news on rates – returns on savings accounts and guaranteed investment certificates are on the rise. Four per cent GICs are now available for a five-year term.

There’s little chance wages will catch you up

Average hourly wages were up 3.4 per cent in March on a year-over-year basis, basically half the inflation rate. It may be possible in certain sectors to negotiate a raise or bonus to fully offset inflation, but on average it looks like pay hikes will fall well short of rising living costs. This means falling purchasing power – you may spend more to buy the same amount of groceries and other goods and services.

Bonds are going to be absolutely pasted this year

Rising interest rates mean lower prices for bonds and bond funds. But you already know that if you’ve followed the conventional advice to have some bonds in your portfolio to cushion against stock market declines. For the year through April 19, the FTSE Canada Universe Bond Index was down 9.7 per cent. We are a few decimal points from double-digit losses in bonds.

Housing looks vulnerable

The average resale home price in Canada is up 47 per cent over the past two years. Now, the cost of financing a mortgage at today’s high prices is rising. Whether you’re a regular home buyer or an investor, these higher financing costs are going to worsen affordability. It would take a considerable price decline to offset the effect of rising mortgage rates.

Q&A

Q: What do you suggest I do to benefit from higher interest rates and inflation? I am a senior, 77 years old, retired, and basically on a fixed income. I am not rich, not poor and my basics are covered. How can I take advantage of the cash I have that is not invested with my financial planner? I do have some TFSA room. That account has cash and laddered GIC’s at the moment.

A: Sounds like you’re a conservative investor, which suggests that your laddered GICs and savings are the right thing to hold. Rates for both are climbing now as interest rates move higher to cool down inflation.


This Globe and Mail article was legally licensed by AdvisorStream.

James Britton CFP, CLU, EPC profile photo

James Britton CFP, CLU, EPC

Financial Planner
Britton Wealth Management and Planning Consultants Inc.
Fax : 866-202-2935