How to handle your finances in the new era of inflation

Jordan I don’t know about you, but I look at my bank account, look at the headlines, look back at the bank account and have a little panic every few weeks.

News Clip The annual inflation rate rose to seven 7.7% in May, up from 6.8% in April. That’s the highest rating since January of 1983 and well above economists expectations.

Jordan There is only so much big picture reporting a podcast like this can do on an inflation rate that just keeps rising. Once we’ve run through the why’s and the how’s and asked people to make predictions that have often turned out to be wrong, what else is there to do but wait and see? What other questions can we ask?

Well, we thought today we’d skip the blame and the theory and the explanations and the predictions and simply ask questions that might help you. Inflation is a fact. So what are you going to do about it? Like actually what? What are the practical steps you should be thinking of taking right now in terms of your budget, your savings, your groceries, your retirement, your mortgage? Inflation, to use a well-worn phrase, is what it is. But that doesn’t mean there’s nothing that you can do to fight it.

I’m Jordan Heath-Rawlings, this is The Big Story. Jason Heath, no relation, I promise, is a personal financial planner. He is also a personal finance columnist whose work appears in many outlets, including The Financial Post and MoneySense. Hi, Jason.

Jason Heath Hi, how are you doing, Jordan?

Jordan Why don’t we just start with a quick review of the economy? I feel like people have sort of heard the general drumbeat of bad news, but when did this inflation spike begin and what do the very latest numbers tell us?

Jason Heath Inflation really started to heat up, I guess in early 2021. And at that time it’s funny because most policy makers, whether it was central bankers or politicians or even economists, thought that it was a transitory or a temporary inflation spike as opposed to something more persistent. Here we are a year and a half later. Inflation is still pushing higher, Canada’s inflation rate, actually, just as of a couple of days ago, the main numbers came out. So May 2021 through May 2022, the one year inflation rate was 7.7%. That’s the highest since January 1983. And it was also ahead of expectations. Economists were calling for 7.4%. And that’s been pretty consistent and inflation has been surprising on the upside.

Jordan When we’re talking about inflation is that the cost of everything sort of averaged out by how much it’s going up? What’s more susceptible or less susceptible to those kind of steep price hikes?

Jason Heath Well, I guess maybe just to define it, inflation in Canada anyways, is measured by the Consumer Price Index, which is usually referred to as CPI or CPI inflation. And it’s represented by the cost of a basket of goods and services and they call it a representative basket of goods and services that is meant to represent what average people are spending money on. And it’s divided into eight major categories. Food is one, and certainly grocery prices are something we’re hearing a lot about going up and obviously noticing at the cash register. Shelter costs is number two, and that includes representation of both ownership costs, home ownership as well as rental. Number three is household operations like furnishings and equipment and stuff like that. Number four is clothing and footwear. Number five is transportation. We’ve heard car prices, especially used car prices, spiking. Number six, health and personal care. Seven is recreation, education and number eight is sort of the sin category, I suppose, of alcohol, tobacco and now recreational cannabis has been added to that category as well.

So in terms of what’s more susceptible to price hikes, energy prices, I mean, you see at the gas station, prices change day to day. Energy and commodities that are repriced every day are much more susceptible to price hikes year over year. Increase in gas prices in May I think it was 48%. In terms of what’s most stable, I guess maybe stable is not the right word, but stuff like luxury goods, consumer discretionary items, stuff you don’t need to spend money on, that have less demand when other prices rise, those are less likely to rise in price or less likely to rise as quickly.

Jordan So a lot of the discussion around the economy in general, inflation for sure, but also just the direction of the economy. A lot of the commentary seems to indicate that this economy could lead us into a recession. Can you explain how that happens and maybe where the connection is between the inflation spike and a possible recession?

Jason Heath For sure. I think one of the big concerns is that if the price increases that we have been seeing, the so called inflation that we’ve been seeing as of late, if wages don’t keep up, so people aren’t getting a 7.7% increase in year over year when inflation is running 7.7%, that’s something that could lead to an inflation. Inflation, interestingly, usually isn’t the main cause of a recession. A recession arises due to a decrease in economic output and a slowing of the sale of goods and services. Normally when there’s a recession, central banks will lower interest rates in order to increase demand. And right now we’re doing the opposite. We’re increasing interest rates to try to reduce prices. And unemployment is something that typically rises during a recession. And right now unemployment is actually at an all time low of about 5%. So a recession does not seem imminent. But who knows, things can change quickly. We’re starting to hear about some job cuts from big companies. So inflation doesn’t necessarily lead to a recession. And even stock markets, stock markets have had a brutal 2022 and stocks falling doesn’t necessarily mean we’re heading to a recession. Either the stocks are responding to higher interest rates and the end of stimulus and the war in Ukraine and other things like that. So could we have a recession? Sure. Is it imminent? Probably not. But a lot can happen in the next six months going into 2023.

Jordan That’s great context. And now I want to focus on–the reason we asked you on this show. We’ve talked about inflation rates over the past six months, twelve months, the cost of everything getting more prohibitive. One thing we haven’t really done is giving Canadians any way to watch their own budget in their own pocketbook. So I’ve seen a lot of writing–you mentioned 1983, Canadians under 40 have never seen anything like this before in their lives. So what’s the first thing, as a financial planner, you’d want them to understand about how this relates to their own bank accounts?

Jason Heath It’s a good point. And I’m 43. I sort of know of inflation in a theoretical capacity as opposed to a real life capacity. Inflation has been pretty stable for almost 40 years now. Last time we saw any sort of meaningful spike was temporarily in the ’90s. And the inflation can cause a lot of pain for people whose wages can keep up, and I think particularly in the form of rising prices, we’re not used to seeing prices go up that significantly. Younger people, or even older people who haven’t seen this since they were much younger. Honestly, I think interest rates are going to be the main thing that is likely to shock young people. People who’ve never seen a mortgage interest rate over 5%, it’s been probably 15 years, probably 2007 was the last time that we saw high rates like this. The prime rate back in 2007 hit six and a quarter percent. We got a ways to go to get to that point, but higher interest rate. I think if real estate prices continue to decline, I think there’s a lot of young people who have been sold on the dream that real estate prices only go up and only go up a lot. And a lot of people under 40 and over 40, I think, believe Canada’s some sort of a unicorn, that prices of real estate never go down. So I think that real estate and interest rates are going to be the big shocker for Canadians over the next few years. Obviously, rising prices are impacting everyone everywhere.

Jordan We’re going to talk about real estate specifically in a few minutes, but maybe first you mentioned that this has started to show up well over a year ago, and we might have thought it was a blip or temporary pain for a few months. If we had known, say, this time last year that this was not going to be a blip. What could we have done then, individually to prepare ourselves for what we’re dealing with now? Aside, I guess, from the obvious, which is put away some money?

Jason Heath Yeah, it’s a good question. And I’ll be honest, I was in the camp said inflation was more likely to be a temporary phenomenon. And a lot of people I was talking to were in that same boat. One of the people that I speak to that was most tooting the horn of inflation and look out actually was a farmer, believe it or not, who was talking about rising prices and some of their costs going up and food shortages and things like that. So it’s interesting. Sometimes you can get a whole bunch of smart people in the room, or so called smart central bankers and politicians and policymakers and economists. And it’s the rank and file people that are seeing the impact of inflation that call at first.

So I think if we could go back in time six months, planning for a rainy day I think is something you should do at any time, especially when the times are good. Building up an emergency fund, for many years now, people have been using their lines of credit to spend a bit more than they make. And it doesn’t seem so bad when home prices are going up 20% a year, right? If your home is going up, 200 grand, doesn’t matter if you put ten grand on your line of credit. A lot of people thought no, but ideally if people could have been planning for this, they would have been getting their finances in order. And I think there’s a lot of people that are worried now about the historically high debt levels that the consumers have built up here in Canada, and it’s going to weigh on the economy and the real estate market in the next five years.

Jordan What are some of the key questions that you are getting right now as a personal financial adviser?

Jason Heath Definitely lots of questions about inflation. I would say I’ve had more questions about inflation in the last six months than I’ve had in the last six years. People who are questioning I do, and we do a lot of sort of long term financial modeling, retirement modeling, retirement planning. How much money do you need to retire? How much money can you afford to spend? My governing body as a financial planner is FP Canada, and they suggest using a 2.1% long term inflation rate. And I’ve never had more questions about a 2% inflation rate than lately when inflation is running so high. It’s a big concern for people.

Beyond that, though, lots of questions about bonds. The Canadian bond market as of today is down about 14% or 15%. And there’s a lot of people saying, geez, bonds can go down in value and bonds can go down 15% in value? What is this? And bonds, if they’re getting too complex, when interest rates go up, bonds go down, and when interest rates go way up, bonds go way down. And this has been a brutal year for conservative investors as a result of bond market losses. And I don’t think people were properly prepared by their investment advisers about the prospect of losing money on seemingly conservative investments.

Jordan How complicated does it get in those conversations when you’re talking to people about planning for retirement, when the inflation rate changes month to month, it doesn’t seem to show any signs of stopping. But on the other hand, as I’ve learned from previous conversations on this show, it could turn around and fall very quickly once we hit the peak. So how do you even approach that kind of thing?

Jason Heath I think a lot of the work that I do as a financial planner anyways, is based on long term decisions, long term trends. Again, going back to FP Canada and their guidelines for certified financial planners, they have suggested that over the long run, if inflation were to stay well above the bank of Canada’s 2% target, it is likely that interest rates would stay higher and stock returns would stay higher and rates of return would be higher to offset that. I think that the other important item for context. The bank of Canada’s target, and most central banks in the west, their target is a 2% inflation rate. The bank of Canada will let inflation run as high as three, as low as one. They try to keep it in that 2% band.

The likelihood of five years from now, inflation still being 7% or 8%, I think, is pretty low. But if it continues for a year or two, there are people that could be hit quite hard. I think, of retirees on non indexed pensions. If you’re retired and you work for the government, or a lot of public sector employees will have indexed pensions that go up with inflation. But most private sector defined benefit pension plans don’t increase with inflation. So if inflation runs high for a couple of years, you could see people who lose three, four, five years of purchasing power in a single year. So I think those are the people with the most at risk, younger people who have a longer timeline. I think this will hopefully just be a blip in a story they tell their kids. Fingers crossed. Anyways.

Jordan Well, now I want to take you through a few specific areas that we’ve heard from our listeners about and see what you’d recommend. And we’ll go from sort of day to day to more longterm retirement stuff. So first of all, just everyday expenses. We talked about this earlier, gas and food particularly. How do you adjust your budget or your savings plan when literally everything is more expensive? And are there any ways to fight this other than just kind of shutting up and taking it?

Jason Heath Yeah, I mean, gas is a tough one, right? I suppose you can bring gas cans to the gas station. There’s only so much gas you can store. Sort of at the mercy of whatever the gas prices are. Simple stuff, obviously, like trying to work from home. If you can carpooling or public transit. Food seems tougher and interestingly. That seems to be one of the main things I’m hearing people complain about. I think that groceries are a big budget item for a lot of people. There are simple steps that can be taken, like buying fewer convenience items. You think about buying a bag salad versus buying the individual ingredients, making it on your own, buying whole fruit as opposed to pre sliced fruit. It’s going to be cheaper, and it’s going to last longer, too, than the pre sliced stuff that you might need to eat within a couple of days.

I think it’s really important right now, Jordan, to look at unit price, which is often listed on grocery store shelves these days because many products are shrinking their sizes in order to maintain level pricing and not increase their prices. But you’re getting less for the same cost. So that’s something to look out for. That’s a big deal right now. There’s some cool apps out there. There’s one called Checkout 51, where you make a list and then you get relevant offers that are matched that list coupons that you can use on your smartphone at the checkout. And if you upload a copy of your grocery receipt, you even get paid to do that, they’re buying your information effectively.

Another one that’s a little bit different is called Flashfood. Flashfood allows you to locate discounted items that are nearing their best before date that are still good if you buy them and cook them within the next couple of days. Especially for people who are spending money on meat based proteins, who aren’t into the plant based proteins, meat prices have gone up quite a bit. Certainly opportunities to use apps like that that can bring down your costs. So there are steps that can be taken with certain parts of your budget, but it’s going to be a tough time, I think, for a lot of people.

Jordan What about savings? I know a lot of us have a certain threshold of our gross income that we contribute every month to a savings account to, as you put it earlier, planned for a rainy day. Is it okay to pull back on that, given everyday expenses? Of course, some people might just have no choice about that. But in general, what should your approach to savings be in such an unstable economy?

Jason Heath To be honest, I think it’s okay to stop saving. As a financial planner, I know I’m supposed to save and find a way, and life happens. And there’s going to be points in your life where you can’t save or where you might even go backwards. You might even be drawing down your investments. You might be incurring debt. But if you look at a typical work life, you might work for 40 years. If you have a bad year or two, you can recover from that.

The challenge, however, is that if it is persistent, you need to look at your lifestyle, your home, your job, etc. In other words, if you’re consistently behind not saving incurring debt, I think there are people that need to question, am I going to be on track for my long term goals if I don’t make some changes to my financial life? If you went to the grocery store and something that you like or need or want is on sale, you’re going to buy more of it, right? Same with stocks. You want to buy stocks when they’re on sale. And this is a great time to just continue dollar cost averaging into the market. And this will be hopefully a blip for a young person, even a middle aged person who’s saving for retirement and has five or more years left until they need their money.

Jordan Where should people be putting their money in this climate? What are the risks to RRSPs, to tax free savings accounts? What do you want to invest in? Especially if you’re somebody that wants to make sure their money is as safe as it can be right now.

Jason Heath I think the environment is improving for conservative investors or bond market investors. Technical short term bonds are less at risk than long term bonds. As interest rates are rising, fixed income investors, bond investors are going to see higher rates. GIC rates, we’re starting to see GIC rates up over 4% for the first time in ten or twelve years.

I think the environment is improving for conservative investors. For investors generally, it’s really hard to time the markets. And if someone is concerned about stocks falling further, or in bonds for that matter, falling further, it’s really tough to be right once, let alone buy back in at the right time and be right twice. It’s tough for the professionals, let alone anyone else. For retirees, this could be tricky if stocks have an extended downturn. But hopefully people who are retired and drawn down their investments going into this have a low sustainable withdrawal that they were taking from their investments. And if they were taking out 3%, 4%, 5% of their investment portfolio, the good news is, if you’re only taking out 3%, 4%, 5% a year, 95%, 96%, 97% of your money is still invested. So your portfolio can recover as long as you don’t panic.

Jordan And last but certainly not least, homes and mortgages–interest rates are expected to continue to rise for the foreseeable future. If someone can renegotiate their mortgage now, should they, should buyers wait to buy or sell their homes? How do you manage real estate given where we are right now?

Jason Heath The time to convert a variable rate to a fixed rate, for example, was last year when fixed rates were like one and a half percent. I’m genuinely on the fence right now. If I were taking a new mortgage or had a variable rate mortgage and wondered about converting it to fixed, there’s variable rate mortgages that are in the 3% range or less. There’s fixed rate mortgages that are 2% higher in the 5% range or maybe even a little bit less, 4.5 to 5%. So to lock in a fixed rate mortgage at 2% higher, it seems like a lot more to pay. But rates could rise 1% in July. There’s speculation that the bank of Canada is going to increase the prime rate between 0.75% and maybe even 1%. And rates could be one and a half or 2% higher by the end of the year. So if somebody could take a four and a half percent fixed rate mortgage right now, variable rate mortgages could be up to 4.5% by January, let’s say. Who knows? 2023 and beyond. It’s hard to say on real estate on the debt side anyways. I think it’s tough.

Jordan How big a shock could that be to Millennials and Gen Xers who have bought their homes, and it cost a ton to buy a home in Canada anytime in the last five or ten years, they’ve bought this house. Their first fixed rate mortgage term is about to end. What kind of hit are we talking about?

Jason Heath Well, just to give perspective, somebody took out a 25 year amortization mortgage at a 2% interest rate. After five years, if the interest rate is 5% at renewal, to stay on that same 25 year time horizon and have a 20 year amortization once the first five year ends, if interest rates went from two to 5%, your payment would go up by 30%. That’s a big hit to someone who’s got a big mortgage and who’s bought in the last few years. And if you think about it, the next sort of 2, 3, 4, 5 years, there’s going to be a lot of very low interest rate, fixed rate mortgages that are coming up for renewal or variable rate mortgages that may have higher payments. So I think it’s really going to be a drag on real estate prices the next few years. I’m not necessarily saying that real estate prices are going to tumble, but boy, I can’t see real estate prices going up significantly. They go sideways for the next five years or more. Did they drop and slowly recover? I don’t know. But I think the 20% growth rates we’ve seen are a thing of the past and people need to plan for more modest growth rates or even no growth.

Jordan What does this mean for people who have so much of their savings and retirement plans tied up in property that probably cost them an arm and a leg?

Jason Heath Yeah, it’s tough. I think that I’ve certainly come across a lot of people who have become comfortable with the fact that they will never pay off their mortgage and are going to need to downsize their house at some point. And I think as long as people went into taking on a big mortgage and buying an expensive home, knowing that might be the case, or knowing that real estate probably should rise at 3% or 4% a year instead of 6 or 7 or 8 or 10% per year. It may be a wake up call for some because they might not have any extra cash flow left over to save and invest. But I think there’s a lot of people that are going to have to reallocate their budget in order to stay on track, in order to do things they want to do today, in order to save for the future.

Jordan Jason, thank you so much for this. It’s great to have some practical advice beyond the doom and gloom about the future. Anything else we haven’t covered that you’re seeing a lot of in your clients that you’d like to pass on?

Jason Heath You’re not alone. Lots of people are worried and we’ve been here before. We’ll be here again. This is just part of the economic and investment and interest rate cycle, unfortunately.

Jordan Jason, thanks so much for this.

Jason Heath For sure, Jordan. Anytime.

Jordan Jason Heath writes in The Financial Post, in MoneySense, in the Canadian Money Saver, and in Retire Happy. That was The Big Story. For more, head to thebigstorypodcast.ca. The price of a visit to that website has just gone up by 7%. You can also talk to us on Twitter at @TheBigStoryFPN. That cost still stable. Follow us. It’s always free. You can of course email us[click here!, and you can call us up and congratulate or complain as you wish. The phone number is 416-935-5935. The Big Story is available everywhere you get your podcasts. I’d prefer you use a player that lets you rate and review so we can see what you think of us. But you do you.

Thanks for listening. I’m Jordan Heath-Rawlings. Have a great weekend. Save money. We’ll talk Monday.

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