Current Inflation
Inflation, regardless of where we have heard the word, be it in a classroom, the news, our homes, the streets etc. we all get the idea that it is the detriment of any economy looking to be or remain a healthy one. But that is uncontrolled inflation, as the professionals will tell you a certain level of inflation is necessary for any economy looking to grow or maintain growth. While we all may not be economists, we do know that whenever we hear inflation as consumers we are hit with a rise in the cost of living. That is because inflation in an economy speaks to the rate at which average prices in the market is expected to increase. Considering two of the larger economies in North America: The United States (U.S) and Canada, we can put into perspective the current levels of inflation in each of these two countries and how the cost of living for their residents is impacted. The U.S consumer price index (CPI) for all items was reported to be 2.6% (before seasonal adjustments) for the twelve-month period ending October 2024. A 0.2% increase from the 2.4% reported for the twelve-month period ended September 2024 (U.S. Bureau of Labor Statistics, 2024). In simple terms the inflation rate in the U.S as at the end of October was 2.6%. As of the twelve-month period ending September 2024, Canada’s total CPI was 1.6% (Bank of Canada, 2024). Again, this simple means the Canadian economy was experiencing inflation at a rate of 1.6% in September.
Target inflation
Going back to the point of controlled inflation, it is important to note that the U.S Federal Reserve targets inflation for its economy of 2% for the long-term, measured by the change in the annual price index for the personal consumption expenditures (PCE) which is considered to be more responsive to consumer spending than its relative the CPI (Federal Reserve, 2024). Canada’s Bank of Canada also aims for target inflation of 2% for its economy, but for the medium term (Bank of Canada, 2024). With our yardstick we quickly realize that the U.S is slightly above its target rate by 0.6% and Canada is just below theirs by 0.4%. So what does this tell us? It indicates that neither country is doing a particularly bad job at meeting inflation targets and still, consumers in both these countries will tell you that the price they must pay for some everyday products or essential services is still high. Well, this is because we are still feeling the effects of the increased government spending, supply chain issues, consumer demand and labor demand (not limited to) which occurred throughout the height of the recent Covid-19 pandemic. These conditions pushed the rate of inflation in the U.S as high as 9% in June 2022 (Vasquez, 2023) and 8.1% in June 2022 for Canada (Wang, 2024). Both country’s governments have been effectively manipulating the policy rate to trim down their country’s inflation to the levels discussed earlier. And, having only recently return to approximate levels for target inflation, it will not be until some 18 to 24 months before consumers can expect to see the effects of the lower rates of inflation (slower increase in prices) throughout the economy, as this is the time it usually takes for policy measures to ripple through the entirety of an economy (Bank of Canada, 2024).
The smart consumer
We know that the sight of percentages in this document is enough to intimidate some readers, but it’s really simple what we have to do as consumers to stay on top of inflationary trends.
Stay abreast of target inflation and current levels of inflation in the economy and remember that its government’s objective to achieve balance between both.
Get familiar with your country’s policy rate as this is the dial regulators use to control the level of inflation in an economy. The policy rate is the interest rate at which a country’s central bank is willing to lend funds to its commercial banks. So, this is simply the cost of borrowing for our everyday banks, which will ultimately feed into our cost of borrowing from these commercial banks. The policy rate is effective in curbing inflation given that when it gets too expensive to acquire money to spend, then we become less inclined to spend. This fact is crucial when inflation in an economy is driven by an increase in demand for a limited supply of goods and services.
Know that the policy rate and the inflation rate share an inverse relationship. This means that when one is up then the other goes down and when one is down the other goes up. Thus, if you observe the current rate of inflation is going exponentially pass target inflation levels, know that the policy rate is down and thus regulators are going to increase it to guide the inflation rate back to target. If you observe the current inflation rate is going too far below target, know that the policy rate is up, and regulators are going to reduce it to guide the inflation rate back to target.
Being informed about and understanding the relationship between the policy rate and the inflation rate can give us as consumers insights into how the prices of real property, finished products and financial securities will trend. Being able to predict how prices will move in the future in relation to market factors such as inflation is crucial to knowing when opportunities for buying, holding and selling assets presents themselves, enabling us to maximize gains and minimize losses on our significant transactions.
References
Bank of Canada. (2024). Consumer Price Index. https://www.bankofcanada.ca/rates/price-indexes/cpi/
Bank of Canada. (2024). Inflation-control target. https://www.bankofcanada.ca/rates/indicators/key-variables/inflation-control-target/
Federal Reserve. (2024, August 02). Economy at a Glance – Inflation (PCE). https://www.federalreserve.gov/economy-at-a-glance-inflation-pce.htm
U.S. Bureau of Labor Statistics. (2024, November 13). Consumer Price Index Summary. https://www.bls.gov/news.release/cpi.nr0.htm
Vasquez, L. (2023, September 01). Unpacking the Causes of Pandemic-Era Inflation in the US. https://www.nber.org/digest/20239/unpacking-causes-pandemic-era-inflation-us
Wang, W. (2024, May 22). High Inflation in 2022 in Canada: Demand–pull or supply–push? https://www150.statcan.gc.ca/n1/pub/36-28-0001/2024005/article/00005-eng.htm
