Canada has set a record-breaking inflation rate this year. Currently, the rate is the highest it’s been since 1983 at 7.7%. Understanding inflation and how it affects personal finances is key to financial literacy. Inflation is when prices for goods and services go up but purchasing power (the value of your money) goes down. Higher inflation rates mean higher prices for everything from groceries to gas to utility bills.

“In a sense, purchasing power and inflation are two sides of the same coin. Purchasing power measures what a unit of currency can buy, while inflation measures rising prices.” – Louis DeNicola, Business Insider

When the prices of goods and services go up, your money can’t buy as much as it used to. This loss of purchasing power affects everyone in the country and brings the standard of living down. The video below offers a good introduction to inflation and its history in Canada.

Please note that the video was released before the inflation rate increased to its current level.

Tips for Coping with Inflation

• Check your monthly budget. Think about two or three things that you can reduce or omit to save money. For example, try to cook your own food rather than eat out. Reduce your entertainment, travel and/or dining out budget.
• Think about increasing your income. Ask for a raise, look for a higher paying position, take on additional shifts or take on a side job.
• Use coupons and search for deals when it comes to buying the necessities like groceries. Buy in bulk where you can. While the cost of meat is very high, consider eating more vegetarian meals.
• Postpone making large purchases this year. If you can, wait until the prices of purchases like cars or home renovations decrease.
• Get a cash back credit card or join a loyalty program to save more on purchases and expenses. Look for reward credit cards with a low or no annual fee.

It’s easy to feel worried when the inflation rate is high and our money isn’t going as far as it used to. Managing financial anxiety is also important. First, it’s important to name the feelings we have around money.

“Acknowledging the feeling is as simple as being honest with yourself to say, “I am feeling worried about finances.” Once you’ve named it, you can do something about it.” – Amelia Baladez

Financial literacy is also a tool to help tame anxiety about money. But take your time to learn about one topic at a time. Try tackling a different topic each month and use a variety of trusted sources. Your local library can help you choose good quality books, podcasts, videos and more. Try changing typical financial jargon into more positive terms you can better understand. For example, instead of using the word “budget,” try using “spending plan.”

To learn more about inflation in simple terms, check out the resources listed below.

Resources

• Basics of Inflation
• An economist explains: What is inflation?
• Explaining Inflation to Kids
• Financial Literacy in Challenging Times
• The Parent’s Guide to Teaching Kids About Inflation
• Understanding inflation

Definitions

Consumer Price Index (CPI): The measurement of the rate of price change for goods and services. The CPI is used as a measure of inflation.

Inflation: The rate at which the value of a currency is falling and, therefore, the general level of prices for goods and services is rising.

Interest Rate: How much interest is paid by borrowers for the money that they borrow. It is usually a percentage of the amount borrowed. So, 10% interest means that if you borrow $100, you pay back $110.

Purchasing power: The amount a single unit of currency (e.g. one Canadian dollar) can buy.

Recession: A significant decline in economic activity spread across the economy, lasting more than a few months.

Standard of living: The level of wealth and comfort people have in a particular society.