Economics 101| Inflation & Interest Rates

Jamie Powell |

A popular topic in the news these days is inflation and its relation to interest rates.  

Inflation and interest rates impact your portfolio

Inflation itself is a measure of the cost of living and Statistics Canada follows nine items, to determine the rate, in which they call "a basket of goods." This "basket" includes things such as food, shelter, transportation, and clothing, and currently the inflation rate is sitting at about 3.6%. The major contributor to this recent rise is related to transportation costs, specifically gasoline to fill your vehicle at the pump.

The inflationary rate for May 2021 in Canada was approximately 3.6%, which is quite high. Normally, the Bank of Canada likes to keep a target for inflation at about 2%, at this rate they feel it keeps the economy moving along and there are not huge risks to fluctuations.

If we do start to see inflation rate creep over 2%, the Bank of Canada has the ability to start to raise interest rates to cool things off. Alternatively, when the economy starts slowing down, like we saw last year during COVID, they can reduce interest rates to try to stimulate the economy. This is the balancing act that the Bank of Canada is continually playing trying to keep the economy moving along on an even keel.

With inflation slowly increasing, the Bank of Canada is keeping a very close eye on the situation to make sure that the economy doesn't run away, but coming out of the lows from last year, and letting the economy heat up a little bit isn't necessarily a bad thing.

Inflation and interest rates do have an impact to your portfolio, a topic which I will save for another day.

If you have any questions, or you would like a second opinion on how to position your portfolio to make sure that we're taking advantage of all these opportunities, please reach out to us or follow Jamie on Facebook for more information.