The Rapid Increase in Prices of Goods and Services Can Have a Major Impact on Canadian Businesses and Households. The Recent Economic Headwinds of Inflation Have Affected Several Countries Worldwide, Including Canada. These Include Escalating Oil Prices, Disruptions in the Global Supply Chain Due to the Pandemic, and the Conflict in Ukraine.

Inflation, Especially Over a Prolonged Period, Can Significantly Affect Our Finances, From Grocery Stores to Gas Stations, and Other Parts of the Economy. In June 2022, Canada Experienced the Highest Inflation Rate of 8.1% Since 1983.

As You Make Financial Decisions, Should You Worry About Inflation? It’s Essential to Gain a Broader Perspective on the Economy and Financial Markets. We Analyze the Potential Effects of Increasing Interest Rates and Inflation on Your Finances.

Understanding Inflation:

In the realm of economics, inflation refers to the rise in prices of goods and services over a period of time. This measurement tracks how prices change and how it impacts the purchasing power of money. There are numerous indicators that economists and investors use to assess the state of the economy, such as unemployment rates, job growth, GDP, trade deficit, and surplus. However, each indicator tells a different story at a given time, which adds complexity and creates a burden on the economy.

To calculate inflation, the Consumer Price Index (CPI) provides an illustration of the cost of specific goods and services, including essential items like food, fuel, furniture, clothing, and entertainment. The Bank of Canada aims to maintain an annual inflation rate of 1% to 3%, which they accomplish by using policy tools such as altering interest rates.

The Connection between Interest Rates and Inflation:

To counteract the effects of inflation, the Bank of Canada began raising its policy interest rates in early 2022, during a time when the economy was flourishing, and the labor market had significantly recovered from the pandemic’s impact. The Bank of Canada reviews interest rates approximately eight times a year, with the primary objective of increasing the cost of borrowing money, making loans for businesses and consumers more expensive and challenging to repay. However, when interest rates increase, individuals are also incentivized to save their money and invest it to receive higher returns from the interest rates.

Making the Most of Tax Refunds amidst Rising Inflation and Interest Rates:

As inflation rates hit a three-decade high of 6.7–8.1% in March and June, the Bank of Canada increased its policy interest rate to 1% in April, with more anticipated rate hikes as the economic landscape evolves. This leads to the question of how this affects the advice given by tax refund advisors.

According to the Official Canada Government website, senior financial adviser Laura Southall from Assante Financial Management Ltd. in Kingston suggests that the improved rates for guaranteed investment certificates (GICs) in Ontario have compelled her to rethink some of her previous recommendations to clients. She advises clients who previously invested their tax refunds or other assets in GICs to keep their money accessible, even if GICs pay 1% and high-interest savings accounts pay 0.5%. Currently, one-year GICs offer a 3% return, making them a more attractive option than savings accounts that only yield 0.75%.

Despite the inevitability of inflation due to the unstable economy of the past two years, Ms. Southall remains optimistic, as the government has promised to reduce inflation to 2% by 2040. She advises building a buffer against unexpected events in life rather than using tax refunds to do so.

Summary

Inflation has become a global issue, affecting many countries including Canada due to rising oil prices, supply chain disruptions, and conflicts like the one in Ukraine. While inflation impacts consumer prices, rising interest rates can incentivize saving for higher returns. In Canada, inflation reached a 30-year high of 6.7% in March and June, making it important to consider how to make the best use of tax refunds during this time.