How Inflation is Eroding Your Wealth
Inflation can be thought of as the general increase in the prices of goods and services in an economy over some period of time. It is usually due to an increased demand and limited supply. It can be related to an increase in money supply (I.e Quantitative Easing). Monetary Inflation occurs when there is an increase in the money supply of a given currency. Think of the stimulus-response during the pandemic. This typically results in an increase in asset prices.
Goods and services inflation, results in a decline in purchasing power of a given currency over time. An estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of the average price level of a basket of selected goods and services in an economy over some period of time. 1 This can be represented as a number called the CPI (Consumer Price Index).
Both Canada and the US CPI measure the level of inflation. It can be presented as a Year over Year (this month compared to the same month last year) or Month over Month (this month compared to last month) 2. You’ll see below in both respective charts (Bank of Canada and the Bureau of Labor Statistics) CPI values ticked higher, bucking the trend of inflation reducing (the rate of change of price growth is reducing), to an increase in the rate of change. Not welcomed news.
Here's the kicker, I think the actual number is higher.
Ask yourself
👉How much has real estate increased?
👉How much has your rent gone up ( notwithstanding rent control)?
👉How much has the cost of gasoline increased?
👉How much has your utility bill increased?
👉How much has your grocery bill gone up?
Likely more than 4% year over year!
I hosted a webinar on Embodia where I discussed the concept of inflation eroding your wealth if you are someone who is a paycheck-to-paycheck consumer or someone who saves more than you invest. The reason is that your purchasing power is declining by 6% year over year. Your goods and/or services you consume are getting more expensive each year. To compound that, unless you received a 6% pay increase over the last 12 months, you are earning less (relative) to what you consume.
In my opinion, if you want to grow your wealth in this environment, saving isn’t the answer (saving is important with certain short/mid-term goals), but instead, investing is the only way to get ahead of this 6% headwind.
Granted, not everyone has similar consumption patterns. We each have distinct wants and needs that govern our spending and this will result in inflation affecting us uniquely. CNBC published an article on the effects of inflation on your income; it does bring to light some interesting topics.
The Bank of Canada has traditionally tried to hold the CPI between 1-2%. This chart illustrates in the preceding years to the pandemic they were successful. At the height of the pandemic, there was actual deflation (due to lockdowns and a supply shock), however in the months following, inflation had a little nitro boost and took off to a level of 8%. With rising interest rates, inflation has decreased steadily the last several months, up until Aug. Now is this a momentary blip, or a start of a trend?
The Federal Reserve Bank of the United States has traditionally tried to hold the CPI at 2%. This chart illustrates in the preceding years to the pandemic they were successful. At the height of the pandemic, there was actual deflation (due to lockdowns and a supply shock), however in the months following, inflation had a little nitro boost and took off to a level of 9%. With rising interest rates, inflation has decreased steadily the last several months, up until Aug. Now is this a momentary blip, or a start of a trend?
All items in the CPI basket have increased since 2020
⬆️ Electricity + 24%
⬆️ New Vehicles + 21%
⬆️ Eggs + 27%
⬆️ Gasoline + 24%
⬆️ Used Cars + 44%
⬆️ Meats + 22%
⬆️ Food at Home + 24%
⬆️ All items + 17%
➡️ Airline Fares increased for a fair share of the last few years but are actually 1% lower than 2020 levels.
The term, for manufacturers’ practice of making products smaller rather than raising prices, was first used in this context by British economist Pippa Malmgren in 2013, according to Merriam-Webster.
Upgrading “downsizing”: Edward Dworsky, a consumer advocate and lawyer who publishes Consumer World, has been writing about shrinkflation for decades, but he only started using that term in 2021.
“I’ve been covering this for over 30 years, and it’s always been called ‘downsizing,’” Dworsky told us. But he started calling it “shrinkflation” because the term “has caught the attention of the media.”
It’s no wonder why the term is gaining currency. Examples abound of brands quietly shrinking their products, from Gatorade to Charmin to Crest. And while in previous eras brands may have expected consumers not to notice, today they’re noticing…and agitating.
Inflation spikes aren’t new. They've happened several times over the last hundred years. What may be new, is that you have never weathered one in your adult/career life. It is one thing to notice that your parents' spending/saving habits change as children and a completely different thing to go through an economic downturn with the responsibilities of a young professional. It won't be easy but it will be worthwhile. It starts first with educating yourself.
You can prepare for most economic hardships by getting your finances in order. It really starts with the basics. You DO NOT need to do it YOURSELF, you can see how I’ve developed my own plan, by grabbing my FREE RECESSION SURVIVAL GUIDE.
