Economists usually attribute inflation to two major factors, each of which can create an imbalance between supply and demand.

The first factor is an increase in demand beyond the economy’s production capacity. This tends to happen when households have access to a lot of cash, which encourages them to spend.

The second is a supply-side factor that occurs when production costs increase due to supply-chain issues, natural disasters or political conflicts, for example.

In 2022, these two factors seem to have joined forces to drive inflation to levels not seen in nearly 40 years. For instance, in July 2022, the cost of groceries was up by 9.2% year-over-year in Canada, and transportation was up by 14.4%. This economic environment also leads to higher borrowing costs, since the Bank of Canada, like other central banks, has been trying to rein in spending by raising interest rates.

But did you realize that the long-term effects could be even more significant? Let’s say that you’re planning to retire in 25 years and expect to need an annual income of $70,000. If inflation were to remain at 8%, it would mean that to maintain your standard of living 25 years from now, you would need an annual income of… $479,000.

Fortunately, the average inflation rate from 1997 to 2022 has only been 2.13%. But still, even that rate could erode your buying power considerably over the long term.

If you’d like some help with making projections and adjusting your strategy, don’t hesitate to talk to your advisor.

Economists usually attribute inflation to two major factors, each of which can create an imbalance between supply and demand.

The first factor is an increase in demand beyond the economy’s production capacity. This tends to happen when households have access to a lot of cash, which encourages them to spend.

The second is a supply-side factor that occurs when production costs increase due to supply-chain issues, natural disasters or political conflicts, for example.

In 2022, these two factors seem to have joined forces to drive inflation to levels not seen in nearly 40 years. For instance, in July 2022, the cost of groceries was up by 9.2% year-over-year in Canada, and transportation was up by 14.4%. This economic environment also leads to higher borrowing costs, since the Bank of Canada, like other central banks, has been trying to rein in spending by raising interest rates.

But did you realize that the long-term effects could be even more significant? Let’s say that you’re planning to retire in 25 years and expect to need an annual income of $70,000. If inflation were to remain at 8%, it would mean that to maintain your standard of living 25 years from now, you would need an annual income of… $479,000.

Fortunately, the average inflation rate from 1997 to 2022 has only been 2.13%. But still, even that rate could erode your buying power considerably over the long term.

If you’d like some help with making projections and adjusting your strategy, don’t hesitate to talk to your advisor.