Post Covid-19 inflation - Is it real?

Posted on Friday 02 July 2021


Post Covid-19 Inflation

From newscasters to radio personalities to journalists, financial experts everywhere are talking about rising inflation rates during the pandemic.

The current rate of inflation in Canada is at 3.4 percent, the highest it’s been in nearly ten years. Given drastically falling prices and the lack of demand for goods and services during the pandemic, the increase in inflation rates is hardly surprising.

But unless you’re an economist, you might be wondering, “What the heck is inflation? Is post-Covid inflation even real?” And maybe you’ve even noticed that you’ve had to flex your budget a little to make up for increased prices for various goods and services.

If you’re feeling lost, don’t worry – we’ve got you covered! In the sections below, we’ll walk you through what inflation is, why it happens, and whether you should be worried about inflation rates after Covid.

What is inflation?

First, let’s talk about the basics. Inflation is the widespread rising of prices of goods and services, such as a college education, a car, or a new haircut. So as prices rise, the purchasing power of each dollar decreases.

Because inflation is connected to overall prices, that means that inflation is also what determines the purchasing power of your money. In other words, a good or service that cost you $10 last year may now cost you $13 today.

Let’s use groceries as an example. Say you purchase the same list of items every week – you buy the same brand and size of milk, eggs, bread, and butter. Over time, you may start to notice that you’re spending more and more each trip, despite using the same list each week. Inflation may be to blame!

Keep in mind that inflation doesn’t apply when an individual business raises costs on their own – it’s about the economy as a whole and determining prices are on an upward trend. When average prices for goods and services across the board are rising, that’s a sign of inflation.

While the end result may be the same (prices are higher, so your cost of living is higher), there isn’t just one cause of inflation. There are actually three different types of inflation:

  • Demand-Pull: In this scenario, the demand for certain goods or services is more than production capacity, causing demand-pull inflation rates.
  • Cost-Push: This type of inflation means that production costs have increased, causing the overall cost of goods and services to increase as well.
  • Built-In: A built-in inflation rate can happen as a result of demand-pull or cost-push inflation. When prices of goods and services go up, that increases the cost of living – which means many workers will demand an increase in pay as well, resulting in built-in inflation.

Is inflation always a bad thing?

Inflation often sounds scary, but it isn’t all bad. As long as rates change slowly, inflation can be good for the economy. Depending on your personal finances (Always try to have good savings), a little bit of inflation may even be good for your wallet, too! Here are some reasons why inflation can actually help you make money:

Higher value for assets

Inflation causes assets to have higher value, like a car or a house. That higher value means you’ll get more money for your asset if you decide to sell. And in Canada, property inflation is a big deal. Despite the pandemic, property inflation has been increasing across the country. If you already have a good handle on your debt then inflation may be able to work in your favor.

More opportunity to invest

From newbies to seasoned pros alike, investors tend to put more money toward the stock market during moderate inflation rates. Buying shares at a lower price – and letting them increase in value as inflation rates rise – can be a good strategy if you’re comfortable with taking a little bit of risk.

If you have an investment advisor, use their guidance to help determine the best ways to use inflation to your advantage in the stock market.

Goods and services can catch up

Small business owners often find themselves decreasing prices in order to stay competitive – and while that helps keep customers flowing in, it doesn’t always provide a fair and honest representation of the work they put in. Whether you’re selling handmade goods on Etsy or renting a chair at a hair salon, moderate inflation could be a welcome opportunity to raise prices.

Interest rates are lower

Inflation tends to lower the costs of borrowing money, which is good news for anyone looking to take out a mortgage, a car loan, or a personal loan. When interest rates are low, more people become eligible to borrow from banks. Lowered interest rates on big purchases, like a house, help free up extra cash for spending on other things, such as goods and services.

And if built-in inflation occurs in tandem, employees could see an increase in their salaries, too! The combination of lower interest rates and higher wages can make moderate inflation incredibly appealing.

Should you be worried about post-Covid inflation?

With widespread vaccine rollouts, phased reopenings and loosened restrictions across the globe, it feels as though the pandemic has nearly run its course. However, there are still plenty of signs that Covid is not over yet. Until 80 percent of the Canadian population is fully vaccinated, the country is still at risk for another surge of Covid-19 cases.

As vaccinations continue to be dispersed throughout the summer, the economy will continue to gradually improve. People will start spending again, and a sudden increase in demand and spending power will naturally create an increase in prices. Post-Covid inflation is definitely a real thing, but it’s also not something to lose sleep over.

Inflation is cyclical, and is a normal part of any economy. And don’t forget that moderate inflation is actually a good thing! Post-Covid inflation means that the individuals and businesses alike are bouncing back, and price increases should be temporary. While your average grocery bill may be a bit higher for now, take some comfort in knowing it won’t be that way forever.