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How to make Canada’s low inflation work for your money

The economic situation today is as good as it gets for your household finances.

Inflation's low at just a bit above 1 per cent and wage increases average about 2 per cent. "Statistically speaking, we're doing better," said Benjamin Tal, deputy chief economist at CIBC World Markets. "But don't tell that to the average person because they don't feel it."

Yes, there are things wrong with our economy today. Growth here in Canada remains in a post-financial crisis funk, big companies have been laying off thousands of workers in recent months and household debt remains at astronomical levels. But from the point of view of people trying to cover their living costs and have a little left over, we've come to a sweet spot.

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Don't waste it. Households will never be in a better position to pay down debt and save more. Inflation will eventually come back to devour pay increases you get.

Canada's inflation rate was 1.2 per cent in December, 0.9 per cent in November and 0.7 per cent in October, which compares to an average since 1995 of about 2 per cent. In its latest report on the economy, the Bank of Canada expressed concern about such a low level of inflation. It's a key reason why interest rates will stay low for a while yet.

Some people are suspicious of our standard inflation gauge, the consumer price index maintained by Statistics Canada. That's understandable when we have both 1-per-cent inflation and larger cost hikes for things such as home insurance, rent, hydro, daycare, university tuition and groceries.

Mr. Tal said the CPI is far from a complete measure of inflation, in part because it doesn't reflect the differing expenses of say, a senior, and a young adult. But it's the best gauge we have in that it reflects price changes in a basket of goods and services relevant to the typical household. Bottom line, you may be paying a lot more for some things, but overall inflation is running at roughly half the level people expect based on the experience of recent years.

Inflation expectations are what guide wage increases – that's why the latest collective bargaining update from the federal government shows average wage gains of 2 per cent in November. What happens to wages when inflation returns to 2 per cent, which happens to be the Bank of Canada's target rate? Probably nothing because wage gains would likely be right in line with inflation expectations. Net result: Your real wage gains (after inflation) will amount to little or nothing.

A worse outcome would be inflation running above 2 per cent. Mr. Tal said it could take a couple of years for inflation expectations, and thus wages, to catch up to a higher inflation world.

This brings us back to the argument that today's economic conditions are as good as it gets for your household. "In real terms, the purchasing power of income is rising," Mr. Tal said. "That's one of the reasons why the consumer surprised on the upside in 2013. Real income was actually better than expected because of lower inflation."

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Spending your increase in after-inflation income is a wasted opportunity. A smarter use of the money is to increase the payments you're making on your line of credit or credit card debt. If you're in the early years of your mortgage and paying mostly interest every month, then consider bumping up payments a little.

If debt isn't an issue at your house, try increasing the amount you're saving on a regular basis. The median total pretax household income in Canada was around $72,000 as of the most recent tally. A modest goal: Try to save an extra 1 per cent of that amount per year, or $60 per month. If you can't hack that, then try to save 1 per cent of your after-tax income.

The unfortunate thing about looking at average numbers for pay increases is that there's no acknowledgment of the workers who have had their pay frozen or their work hours reduced. Plenty of people are hurting in today's economy – we know that from the recent headlines about job losses at Bombardier, Sears, BlackBerry, Potash Corp., Heinz Canada and Kellogg. Quietly, though, there are some economic numbers working in your favour. Act now, or watch inflation eat your lunch down the road.

Follow me on Twitter: @rcarrick

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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