Is Inflation Good or Bad?

Inflation is not automatically good or bad.

A low and predictable rate of inflation is considered normal in a healthy economy.

Problems arise when prices increase too quickly or when inflation becomes unpredictable.

In Canada, the Bank of Canada targets 2% inflation within a 1% to 3% range.

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What Is Inflation?

Inflation is the rate at which the average prices of goods and services increase over time.

For example, if something costs $100 today and inflation is 2%, it would cost about $102 a year later if its price increased at the same rate.

Inflation means each dollar gradually buys less than it did before.

Why Can Some Inflation Be Good?

Moderate inflation can be a sign of a growing economy.

When inflation is low and predictable, consumers and businesses can make financial decisions with greater confidence.

It can also encourage spending and investment rather than keeping all money in cash indefinitely.

The Bank of Canada says low, stable and predictable inflation helps the economy function better.

Why Is High Inflation Bad?

High inflation causes prices to rise faster and reduces the purchasing power of your money.

If your income does not increase at the same pace, you may be able to afford less.

High inflation can affect:

• Groceries
• Rent
• Transportation
• Utilities
• Travel
• Household expenses

It can also make financial planning more difficult because future prices become harder to predict.

How Does Inflation Affect Your Savings?

Inflation reduces the purchasing power of money sitting in cash.

For example, if your savings earn 1% interest while inflation is 3%, your balance may increase in dollars but lose purchasing power over time.

This is why the return you earn on savings should be considered alongside inflation.

How Does Inflation Affect Wages?

Higher wages can help offset inflation.

If prices rise by 3% and your income also rises by 3%, your purchasing power may remain relatively similar.

If your wages rise more slowly than prices, your real purchasing power decreases.

This is why people can feel financially worse off during periods of high inflation even if their salary has increased.

Can Inflation Be Good for Borrowers?

Inflation can sometimes make existing fixed rate debt easier to repay over time.

For example, the dollar amount of a fixed mortgage payment does not increase simply because inflation rises.

If your income increases over time, that fixed payment may represent a smaller portion of your earnings.

However, high inflation can also lead to higher interest rates, making new loans and variable rate debt more expensive.

Is Deflation Better Than Inflation?

Not necessarily.

Deflation occurs when the overall price level falls.

Lower prices may sound beneficial, but prolonged deflation can cause people and businesses to delay spending because they expect prices to fall further.

That can reduce economic activity, production and employment.

The Bank of Canada is concerned about inflation falling too far below its target as well as rising too far above it.

What Is a Healthy Inflation Rate?

The Bank of Canada's target is 2%, with a target range of 1% to 3%.

The goal is not to eliminate inflation completely.

Instead, the goal is to keep inflation low enough that prices remain relatively stable and predictable while allowing the economy room to grow.

So, Is Inflation Good or Bad?

Moderate inflation is generally not a bad thing. Low and stable inflation is considered part of a healthy economy.

Inflation becomes more harmful when prices rise rapidly and wages cannot keep up. This reduces purchasing power and makes essentials more expensive.