How to act as the pandemic comes to an end and inflation returns?

Spring is just around the corner, and we can finally look forward to a progressive return to normal. The bad news: after the pandemic comes inflation. The good news: there are ways to help limit the damage!

The first thing to do is to acknowledge the facts and to realize that it’s not all just a scare tactic designed to terrify the world.

A consumer price index on the rise

According to Statistics Canada, from December 2020 to December 2021, the consumer price index jumped 5.1% in Quebec, making it the highest increase in 30 years.

The cost of groceries is steadily climbing

One trip to the grocery store is all it takes to realize that prices continue to soar. The price of beef, for example, increased over 15% in just one year. And consumers need to pinch their pennies even more if they want to buy items such as bacon. Fruits and vegetables are more expensive too, as is always the case this time of year.

And that’s without counting the pressure felt by many businesses so early in the year. A decision made by the Canadian Dairy Commission means Quebec milk is slated to go up 5% (which will have direct impacts on the price of butter, cheese, yogurt, etc.), while gas station employees are busy changing their displays to reflect the ever-changing price of gas, which jumped 10% in a single month.

Hopeless? Not necessarily.

What’s hiding behind inflation?

First off, the increase in food and gas prices depends, essentially, on cyclic factors. In other words, said increase is a victim of circumstances. Bad weather conditions affected cattle producers, both here and abroad, while geopolitical risks, such as a possible conflict between Ukraine and Russia, a big petrol producer, fuels speculation. But in reality, with the rise in popularity of electric cars, the demand for hydrocarbon is expected to diminish and prices will eventually follow suit.

This does not, however, mean that inflationist trends are temporary. There’s an element that currently impacts, and will continue to impact, inflation: the labour shortage, which is not going away anytime soon. To attract talent, employers have no choice but to offer better work conditions. These better work conditions cost money, which causes businesses to increase their prices.

Good habits to adopt during inflation

So, looks like life is about to get more expensive. How should we react?

Advice for individuals

The first thing to do is to free yourself from debt as much as possible, especially when it comes to “bad debt,” or debt related to consumerism—namely lines of credit whose interest rates will increase accordingly.

“Good debt,” or debt associated with a long-term asset such as real estate, is not as impacted. Homeowners who have opted for fixed mortgage rates have some time before they need to renegotiate their loan. Those who have variable mortgage rates, which were advantageous for many years seeing as they were lower than fixed rates, will now have to accept their banking institution’s terms and conditions.

One way or another, the major increase in real estate prices has benefitted all homeowners. Their assets continue to increase, while their debt diminishes with every mortgage payment.

Advice for employees

Now, how to act so as not to be penalized, knowing that the cost of living will significantly increase but not knowing to what extent exactly?

For employees who are backed by numbers—for example, those who are unionized—it’s going to be important to demand salary adjustments in order to neutralize this increase and maintain buying power.

These negotiations won’t be easy. Is the inflation we’re facing temporary or permanent? That’s where certain clauses come in, stipulating adjustments according to any changes to the economy . . . as long as both parties agree. It’s only logical.

But most employees are not unionized and can’t count on support in numbers. They’ll need to rely on their boss’ judgement, and not only in terms of equity. The current labour shortage means employees have the upper hand. Managers and bosses don’t want to lose any of their employees, knowing how hard it could be to replace them.

Advice for consumers

First off, they should consider putting off purchasing hard assets (cars, appliances, furniture, etc.) on credit. The Bank of Canada is determined to maintain inflation at around 2%. The upcoming increases will ultimately diminish. The more time passes, the less the cost of money will be.

Secondly, if you can afford it, keep your financial status as is. To not apply for a loan unless it is absolutely necessary. Short-term, interest rates are inevitably going to climb, but they might just end up dropping again later.

The masks that were meant to protect us will soon disappear, but it’s important that our financial vigilance remains.