What is inflation?
Inflation is the rise in the prices of everyday things over time. Statistics Canada measures it with the Consumer Price Index (CPI), the cost of a typical basket of goods and services.
If prices rise faster than your pay or your savings, you’re getting poorer without noticing.
$100 kept as cash would buy
$74
of today’s shopping
Something costing $100 today
$134
in 10 years
At 3% a year, prices double about every 23 years.
Why the Bank of Canada changes rates
The Bank of Canada sets the policy interest rate, which banks’ prime rates follow. It announces it on eight scheduled dates a year.
- When inflation is too high, it raises the rate. Borrowing costs more, people spend less, and price rises slow.
- When the economy is weak, it cuts the rate to encourage borrowing and spending.
What it means for you
| What you have | When rates rise |
|---|---|
| Savings account | Pays more, especially high-interest accounts |
| Variable-rate mortgage, HELOC | Costs more straight away (or more of each payment goes to interest) |
| Fixed-rate mortgage | No change until you renew, then you pay the new rates |
| Credit card | Usually no change: card rates are already high and fixed |
| New car loan or mortgage | Costs more to take out |
Five-year fixed mortgage rates follow bond yields more than the policy rate, so they don’t always move together. The big risk for most homeowners is renewal: if rates are higher when your term ends, your payment jumps. With a variable-rate mortgage that has fixed payments, rising rates mean less of each payment goes to the loan, and your lender may raise the payment if interest takes up too much of it.
Beating inflation
What matters is your real return: what your money earns after inflation. Savings paying 3% when inflation is 2% grow by about 1% a year in real terms.
- Keep your emergency fund in a high-interest savings account, ideally inside a TFSA.
- For goals more than five years away, investing has historically beaten inflation by more. See investing basics.