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In 1981, the safest investment imaginable paid 19.5 per cent.

Now discontinued, Canada Savings Bonds had a run of decades as a trusty way to save money safely. But CSBs were never better than in ‘81, a year when out-of-control inflation hit 12.5 per cent.

Inflation’s running at 8.1 per cent today in Canada and it reached 9.1 per cent last month in the United States. But the best rate you can get on safe savings is 3 per cent for a high-rate savings account and roughly 4 to 5 per cent on a guaranteed investment certificate.

There’s a strong argument against saving today in that your after-inflation return is negative. Pay it no mind. By saving – or more precisely, not spending – we help reduce inflation and the need for the kind of shock interest rate hikes we saw last week.

When the Bank of Canada raised its overnight rate by a full percentage point to 2.5 per cent, it was the biggest increase in this benchmark since 1998. But it’s the early 1980s that seem most relevant to today’s world of high inflation and soaring rates. Think of this time as an example of what happens if we don’t get inflation under control quickly.

The early ‘80s brought the culmination of sharply rising inflation through the 1970s, says Mike Moffatt, economist and assistant professor at the University of Western Ontario’s Ivey Business School. Central bankers of the day had to respond with massive force, which meant raising their benchmark rates into the economic stratosphere.

The Bank of Canada’s trendsetting rate hit 21 per cent in 1981, and the prime rate used by major banks for elite borrowers peaked at 22.75 per cent. The current prime is 4.7 per cent.

Recent rate increases by the Bank of Canada are an attempt to contain inflation before it embeds itself into the economy like it did in the 1970s, Prof. Moffatt said.

“Inflation gets sort of baked in if you expect prices are going to go up by 7 or 8 per cent a year,” he said. “You’re not going to save money – you’re going to go out and buy stuff right away. Because the longer you wait, the more prices are going to go up.”

The Bank of Canada has been criticized for seeing inflation as temporary for too long and thus delaying a return to more normal interest rates from the pandemic lows. But last week’s supersized increase in the overnight rate shows a commitment to aggressively countering inflation.

Prof. Moffatt said a big part of our inflation problem is caused by high energy and food prices, which are connected to war in Ukraine and supply chain issues related to the pandemic. But he also sees signs of an inflationary mindset in the population.

“There does seem to be this sort of belief that inflation is here to stay and I think it’s causing people to look at their behaviour – to ask for wage increases and things like that,” he said.

It’s up to the Bank of Canada, not you, to create conditions where people don’t have to ask for a big raise to keep up with the cost of living. But the world of 1981 reminds us what happens when inflation guides our economic behaviour.

One-year mortgage rates hit 21.25 per cent in the summer of 1981, Bank of Canada records show. In addition to that jumbo rate on CSBs, a peak yield of 18.8 per cent was available from five-year Government of Canada bonds.

The result of rates this high was a pullback in inflation and, in turn, rates themselves. Mark the lesson here for savers in a time of high inflation. The higher rates for bonds and GICs go, the more reward there is for buying them and locking in for as long as you can. The moment of opportunity may not last, though.

“I think there is going to be a peak for rates, not a plateau,” Prof. Moffatt said. “We will hit some level where inflation risk subsides, and then interest rates can kind of slowly drift back down. Anybody who locks in and buys a five or 10-year bond at the peak will do quite well.”

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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