My finances 5 min

What is inflation and how does it affect your savings?

Find out everything you need to know about inflation and how to reduce its impact on your retirement and investments.

By Fonds de solidarité FTQ

H ow can you measure the impact of inflation on your daily spending, investments, and retirement plans? More importantly, how can you reduce its effects? The following information and solutions will help you better understand these concepts.

What is inflation?

Do you find yourself talking to your friends and colleagues about how everything seems to cost more these days? This is largely due to inflation, which refers to a general and perpetual increase in what things cost over time. In fact, this increase impacts every single aspect of your finances and savings, whether you're purchasing a home, saving for retirement, buying groceries, keeping clothes on your back, or putting gas in the car.

In addition to increasing the cost of living, inflation usually leads to a decrease in the value of money, higher interest rates, and a decline in your purchasing power.

The effects of inflation on your purchasing power

Your purchasing power refers to the amount of goods and services you can buy with your income.

Unsurprisingly, a decline in purchasing power forces consumers to make choices, which can lead to reduced consumption in several sectors of the economy, especially if incomes do not increase at the same rate as prices. The economic instability created as a result of this phenomenon affects society as a whole, from consumers to investors to businesses.

If inflation is too high, it can eat away at your savings and affect your retirement plans, especially if you don't have a pension indexed to the cost of living to fall back on.

How is inflation calculated?

In Canada, the key benchmark for determining the inflation rate is the Consumer Price Index (CPI). This index is used to measure changes in the prices Canadian consumers pay over time. It's also used as a barometer by employers and governments, namely to index wages to the cost of living, or to adjust the Québec Pension Plan (QPP)Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab. or Canada's Old Age Security (OAS) pensionAttention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.. This ensures that the amounts paid to pensioners keep up with inflation. However, the level of annual indexation can vary for private plans, so it's important to be vigilant and compare your options carefully. 

The causes of inflation

Now that you know how the inflation rate is determined, let's examine what influences it. Inflation can be caused by several factors, such as:

  • An overly rapid growth in demand for a product or service in relation to its supply
  • A significant increase in the price of imports, especially raw materials
  • A general increase in production costs
  • A significant increase in wages and disposable income for consumers
  • A general decline in productivity

Inflation and global crises

In Canada, inflation had been stable for several years, but the global health crisis caused by the COVID-19 pandemic has caused it to rise. In fact, the government has recently had to implement significant financial measures to help citizens and businesses. All of these extraordinary expenses have inevitably increased Canada's federal debt levels, and the government has had to print a lot of money to finance all of this support, which has caused a decline in the value of the Canadian dollar.

In normal times, such levels of inflation would trigger higher interest rates to compensate for the loss of currency value. However, because of the pandemic, Canadian banks have kept interest rates particularly low to support Canadians. This very low interest rate, combined with a very high inflation rate, has contributed to a real estate boom and a significant increase in household debt levels.

Add to that the labour shortage, supply chain issues, and a significant increase in wages, and it's not hard to understand why inflation has been so high throughout this period!

How can you fight inflation?

With inflation rising so sharply, planning your finances and retirement is more crucial than ever. We recommend using this personal inflation rate calculatorAttention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab.Attention, this link will open a new tab. to measure the true impact that current inflation rates are likely to have on your monthly and annual expenses.

Of course, your spending habits also play a major role in managing your finances. To offset the effects of rising inflation rates, you can change or replace some of your spending habits by choosing to buy products that are less affected by inflation. For instance, you can replace certain animal-based proteins with plant-based proteins at the grocery store, or leave your car at home and take public transit a few days a week to save money on gas.

Investment performance: Another important factor

Another way to mitigate the effects of inflation is to avoid investing in savings products with returns that are lower than the inflation rate over an extended period of time. On the other hand, a rate of return that is higher than the rate of inflation will help increase the value of your assets and grow your savings. In other words, to keep up with rising prices, your investment returns will need to increase at the same rate as inflation, at least.

The Bank of Canada has created an online tool you can use to calculate the effects of inflation on your investments.Attention, this link will open a new tab. Use it to find out how much you should invest today to reach your financial goals.

Effective retirement planning despite inflation

The impact of inflation on your savings is just one more reason to start planning for your retirement today. To ensure you have everything you need once you retire, our FlexiFonds mutual fund advisors recommend implementing a solid retirement plan and reviewing it every two years to make sure you stay the course.

The FlexiFonds offering: retirement savings solutions

Are you looking to maximize or consolidate your retirement savings? The Fonds de solidarité FTQ has launched the FlexiFonds offering to meet your needs and support you throughout your retirement. Better yet, with these new products, you can continue to support Québec's economy! The FlexiFonds offering is the logical extension of your Fonds experience.


FlexiFonds de solidarité FTQ Inc.
The units of the FlexiFonds funds are distributed solely in Québec by FlexiFonds de solidarité FTQ inc., a mutual fund dealer wholly owned by the Fonds de solidarité FTQ. FlexiFonds de solidarité FTQ inc. does not distribute the units of any other mutual funds. Management fees and other expenses may be associated with mutual fund investments. Please consult your advisor and read the prospectus and the fund facts documents before making an investment. The units of the FlexiFonds funds are not covered by the Canada Deposit Insurance Corporation nor any other government deposit insurer. The FlexiFonds funds are not guaranteed, their values change frequently, and past performance may not be repeated.

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