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Will Inflation Change Canadian Investment Strategies?

Written by Posted On Tuesday, 05 December 2000 00:00

"If inflation remains low in Canada, why is everything getting more and more expensive?"

That's the question that has many Canadians stumped.

The inflation rate is an arbitrary measure of the progressive increase in prices of goods and services used by the government to set monetary and other policies. The inflation rate has two variations -- the headline inflation rate which includes volatile food and energy costs and the core inflation rate which does not. Quoting the latter can give Canadians a false sense of security.

Earlier this year, the Globe and Mail stated: "In recent months, rising oil prices have pushed the year-over-year rate up to 2.3 per cent in January, although if food and energy prices are excluded, the so-called core inflation rate is only 1.4 per cent."

Recently, Statistics Canada announced that higher energy prices had pushed the October inflation rate to 2.8 %, up from 2.7 % in September.

Double digit increases in heating fuel costs, at the gas pumps and in our shopping baskets, have many Canadians feeling financial pain in their pockets, even with inflation at what is considered relatively low levels. Costs steadily rise on other fronts too. Mortgage interest costs, rents and telephone services are all up. Property taxes have increased in all but Manitoba, Quebec and the two northern cities of Whitehorse and Yellowknife. Ontario's recent round of market value property tax reassessments has left Torontonians in the lakeside Beaches community anticipating hikes of up to 35%.

Increasing numbers of Canadians fear that cost-of-living increases may drive their current standard of living out of reach. Being able to afford to stay in the home they love as taxes rise and energy costs rise is a growing concern for Canada's 3.9 million over age 65 since many of them are on fixed incomes.

Without proper planning, inflation can erode purchasing power and cancel out your investment efforts. If the interest rate you earn on savings is less than or equal to the inflation rate, then inflation has cost you ground.

Wages and pensions which are indexed, that is, calculated to rise with increases in the cost of living, help some Canadians stay ahead of inflation, but many people live in a non-indexed world.

The recent report, 2001 Global Compensation Planning Report, released by William M Mercer [ link if you like ], human resource consultants, shows that pay increases in most major countries will range from just over 1% to 6%, hovering a few percentage points above inflation rates, which are predicted to rise 1% to 4% in 2001. The annual report, which examines pay and economic trends in nearly 60 countries worldwide, provides information for employers planning compensation programs.

Danielle Bushen, a Mercer Compensation consultant, says, "Globally, we're seeing relatively little inflation predicted for the next year. As a result, pay increases will be relatively flat, too."

The reports says Canadians may expect the following annual base pay increases where employers base raises on a projected inflation rate of 2.3% for Canada in 2001:

  • Blue Collar Employees 3.4%

  • White Collar Employees 3.7%

  • Management Employees 3.5%

  • Top Management 3.9%

The harsh reality is that everyone needs strategies for fighting inflation even when it is at seemingly low levels. Ideally, the goal is to invest in assets which grow enough to stay ahead of inflation. Real estate is generally considered an investment which will at least keep up with inflation, however, local variations may provide for even greater appreciation in value.

What are the best strategies for maintaining or enhancing your standard of living over the years? Talk to a competent financial advisor to discover how you can best achieve your financial goals and fight inflation.

Don't react too quickly if you are advised to sell off your real estate and buy mutual funds to combat inflation. Many financial advisors are biased when it comes to evaluating an investment in home ownership since they do not earn any commission for trades in real estate.

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