Latest numbers show that inflation is hovering around 7% in the US, and 4.7% in Canada. After more than 2 decades of ultra-low inflation rates, these new numbers are stunning. We’ve had high inflation before, but in all other times in history, we’ve had correspondingly high-interest rates, which have made the inflation manageable.
In the 80’s, one could keep inflation at bay by purchasing a 17.5% GIC (1982), for instance. In times when GICs are at near-record lows, bond yields are at near-record lows, and high interest savings accounts are at almost zero, there really aren’t many conservative options that we can turn to that can help you keep up. Safe to say, we have never seen a situation quite like this before.
When inflation was running at 2%, sitting on cash was palatable. For some peace of mind, it’s a small price to pay. However, the cost of sitting in cash has increased dramatically. If a person was sitting on $50,000 cash, an inflation rate of 7% would mean they are losing $3500 in real value, or purchasing power, in one year. In this way, nest eggs that are sitting in cash can be chewed up quickly.
So what do you do?
Everyone should always have an emergency fund, don’t empty out your savings completely. You should be keeping some liquid assets in a safe place in case the worst happens. However, any assets that you do not need in the short-term, or for an emergency fund, should be getting invested. Stocks are a natural hedge to inflation (when the cost of Walmart’s products goes up, so should the value 0f Walmart stock) so the portion of your portfolio that is invested in stock will naturally protect you from inflation. Therefore, we should all take a look at the amount of cash we are holding, and separate the money we need for emergencies, and the short term from the TBD money, or the money we are sitting on, and invest the latter. You don’t need to be super aggressive, we have a lot of options which should keep pace with any increases in the cost of living.
Moreover, we should all reconsider what we are doing with our mortgages. Are you rapidly paying off your mortgage? Maybe you should rethink this strategy. We would expect housing prices to increase with inflation (of course they’ve risen much more, but going forward, they can at least be expected to keep pace with inflation), but the outstanding balance on your mortgage will not increase with inflation. The total amount of debt you owe will stay the same. If your salary is keeping pace with inflation (it should), and your house price is increasing, but your mortgage is staying the same, this is great for you. In a real sense, inflation is paying your mortgage for you. Consider this – if you have a million dollar mortgage, and inflation is at 7% for a year, the value of your loan in real terms is decreasing by $70,000 that year. So why are you rushing to pay back a debt that is rapidly decreasing in value on its own?
We’ve only seen these high inflation numbers for about half a year, but there is no indication that these numbers are transitory. We need to adjust our attitudes quickly to this new reality and take advantage.
 Current US Inflation Rates: 2000-2022 | US Inflation Calculator
 Canada’s inflation rate rises to new 30-year high of 4.8% | CBC News