Inflation Or Recession, Here Is How To Spot The Difference And Manage Both!

It just seems as if inflation is everywhere these days! From the price of avocados to the gas pump, a cup of coffee or buying a new winter coat, we are always paying more for products and services.?

Economists are closely monitoring these price hikes and updating us on a potential recession or sometimes even a stagflation (when the economy is stagnant combined with high price increases).

A Clear Definition of Inflation

According to the?Bank of Canada inflation?is a persistent rise in the average level of prices over time as opposed to 1 and 3% which is considered normal.

Plenty of Time To Adapt

Normally when inflation holds steady at 2% per year, it takes about 35 years for the price of goods and services to double. That’s plenty of time for us to adapt!

The Unit of Measurement for the Consumer Price Index is (CPI) to measure the inflation rates. Economists will use a realistic “table” to show the evolution of costs paid by households for transportation, groceries, clothes, etc.?

The many causes of inflation:

• Supply and demand — We may be more familiar with this one because it get the most publicity, when the number of buyers outnumber the products, prices go up. Many sectors are also experiencing distribution issues on top of it.
• Labor shortage and salary increases — This is the result of labor shortages in the workforce to the point where employers are countering this problem by offering more attractive salaries. As a result, in most cases, they increase their service rates or prices to even things out.
• Increases that cause more increases — For example, restaurants pay more for food (just like we do), so their profit margins shrink, causing them to increase prices on their menu in order to remain profitable.

Dealing with the impact of Inflation

There are many consequences resulting from inflation. Here are a few major ones:

• When the cost of nearly everything increases, our dollar doesn’t go as far. We will need more money just to maintain the same purchasing power. Unsurprisingly, people whose income remains stagnant, such as retirees, are most impacted.
• Since increases create insecurity, consumers and companies will oftentimes put many projects on hold until the economy regains itself. For a household, it could mean delaying the arrival of a child, a return to school, buying a first house, etc.
• Banks will increase interest rates?in an attempt to slow down the economic activity in hopes of controlling inflation. This will mean our mortgages or any other loan will cost more in interest.

A Solid Understanding Of A Recession

A recession occurs when economic activity declines for 6 straight months in most sectors. It’s measured using the gross domestic product (GDP). This disruption also impacts the work market and causes job losses.

A recession may occur in certain countries, but?global recessions like the one we experienced in 2020 ?are exceptional circumstances. Reassuring fact: Recessions are temporary, usually lasting less than a year. Sooner or later, the economy rebounds.

Causes of Recessions.

They can be caused by a variety of things, such as:

• Inflation and an increase in interest rates
• Decreasing government investments
• Stock market crash
• Economic turmoil due to a major event such as war, a natural disaster or pandemic
• A decrease in household spending

Dealing with the consequences of a recession.

When a recession sets in, unemployment rises and income tends to plummet. To offset this, the Canadian job market has grown significantly since the end of the pandemic, so no worries there.

Another recession would probably cause the following:

• Consumers and businesses would cut their expenses.
• Savings and investments?would yield smaller returns.
• Households or businesses will face the problems of going into debt to pay off bills as their income decreases!

Preparing Ourselves financially

Since inflation is a reality right now. Recession or not, there are ways we can adapt.

• Make sure to have an emergency fund for at least 3 months. This will help us avoid getting into debt during hard times. We can put the money in a savings account or a TFSA?and over time the money will start to pay us interest returns.
• Updating our budget (or preparing one): We are better able to monitor expenses and cut back on spending we don’t need.
• Having a strategic plan for paying back our debts is also very important so if possible we can bundle them with a lower interest rate.
• We can make note of all purchases, as well to see if they agree with our budget.
• We can invest each month to take advantage of a bearish market so when it recovers our gains will be larger. Every penny counts and will add up to large dollars!

If you have stocks or investments, you’ll need a strategy.

• Avoid updating your portfolio when your investments drop. You’ll be losing money if you sell low, and miss out on potential gains when the market rebounds.
• Make sure your investments are diversified and that their average return over the long run is greater than inflation rates.

A licensed professional can help you build a personalized strategy based on your investment profile.

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