Inflation: Why Does Life Keep Costing More?

"Back in my day, you could get a burger, fries and a Coke for $3.99. Now that barely covers the Coke."

This very unc-like complaint is a good description of inflation, the gradual increase in consumer prices over time.

Inflation means your money buys you less today than it did in the past. You'll often hear it characterized as a devaluation of a particular currency.

Any way you slice it, the effect is the same. When inflation rises, your buying power decreases.

» MORE: How to budget your money

How does inflation work?

Inflation is largely influenced by supply and demand. Prices tend to go up when the demand for products or services is greater than the available supply.

Over time, several factors can combine to put continual upward pressure on prices, such as:

Inflation might also increase during periods of low interest rates. When interest rates are kept low, like they were during the COVID-19 era, it's cheaper for businesses and individuals to borrow — and spend — more money. The heightened spending can draw down supplies and lead to higher prices.

» MORE: 5 survival strategies for times of high inflation

What is the inflation rate and how is it measured?

A country's inflation rate describes how much prices have risen over a certain amount of time, typically a year.

For example, if Country X's inflation rate was 3% in January 2020, that means prices increased by an average of 3% compared to January 2019.

Canada's inflation rate

The Bank of Canada measures the country's inflation rate using the Consumer Price Index (CPI).

The CPI tracks price changes for various goods and services in Canada over time. These goods and services are divided into nine categories:

These goods and services are gathered into a “virtual shopping basket,” which is averaged out and compared over time to assess inflation across the country.

Can inflation be a good thing?

Inflation mostly sucks. Prices rise faster than we can earn more money, which puts added pressure on our finances.

Even if we could all suddenly earn more, we'd probably spend it, drive up prices and be dealing with even higher inflation.

But inflation can be beneficial in some cases. If you're an investor who owns a home or shares in an oil or mining company, for instance, inflation might increase the value of your assets.

And if inflation heats up to the point where the Bank of Canada raises interest rates to cool it down, a high-interest savings account or GIC could earn you a little more money.