How to Protect Yourself Against Inflation

March 16, 2023

Inflation is when prices go up, and as a result, the value of money goes down. It’s a term we’ve become all too familiar with as inflation in Canada hit a 40-year high of 8.13% in 2022. Although inflation has slowed in more recent months, prices are still elevated.

How is inflation measured?

In Canada inflation is measured using the Consumer Price Index (CPI), which is the cost of a fixed basket of goods and services. Inflation is the percentage change between the CPI in the current month and the CPI in a base month or the same calendar month of the previous year.

Why is inflation high right now?

Inflation is complicated, with a multitude of triggers such as supply chain disruptions, geopolitical events, labour shortages, changes in consumer purchasing patterns, poor weather or natural disasters, tariffs, and higher input costs. Unlike past trends, many of these conditions or pressures have been occurring simultaneously over the past 2+ years

Is inflation good or bad?

The Bank of Canada aims to keep inflation at around 2 percent. A certain level of inflation is considered positive because it means the economy is growing. It can also work in the favour of debtors, whose debt has less worth as time progresses, and whose wages are presumably keeping up with inflation. Low, stable inflation helps money keep its value and it makes it easier for businesses and individuals to plan their finances.  

When inflation gets too high, the loss of purchasing power hurts everyone’s standard of living. High inflation is often unstable, making it difficult for businesses, consumers, and investors to plan their spending. High inflation is especially hard for those whose incomes don’t keep pace with rising prices, such as pensioners and those with low pay.

How can I protect myself and my assets against inflation?

The role of inflation should be a key consideration in your retirement or long-term financial plans. Here are some ways to protect yourself against inflation:

1. Re-evaluate your purchasing habits. The increased cost of food has been one of the leading drivers of inflation over the past two years. However, not all food costs increased at the same rate. Beef and orange juice, for example, experienced steeper price jumps than other foods within their respective categories. Expand your recipe repertoire and compare options within the food groups to avoid feeling the full effect of inflation at the grocery store.
     
2. Don’t hold too much cash. Keeping too much cash in a chequing account or a low interest savings account can be risky as it will lose value over time due to inflation.
   
   
3. Invest in assets that appreciate in value. Consider investing in assets such as stocks, real estate, and commodities that tend to appreciate over time, helping you hedge against inflation.
   
   
4. Increase your income. If you increase your income to match or beat inflation, you can maintain your purchasing power and avoid a decrease in the value of your money. Negotiate a raise, seek out a better paying job, start a side hustle, and invest in your education and skills.
   
   
5. Diversify your portfolio. Spread your investments across different asset classes and sectors to reduce the impact of inflation on your overall portfolio.
   
   
6. Keep track of inflation. Stay informed on the monthly and annual inflation rates so you can be prepared to adjust your investment strategy accordingly.

Inflation is a force largely out of our individual control, and protecting yourself against it is a long-term process. By investing and spending with inflation in mind, and increasing your income over time, you can help ensure your assets and portfolio remain protected. Our team of wealth advisors at ABCU are knowledgeable on the latest inflation hedging investment strategies, and they’re ready to help you build a budget and portfolio that preserves your wealth. Contact us to book your appointment: 1-888-929-7511.