Inflation is fading, and so are wage increases.
Fortunately, the drop in inflation has a lot more momentum than hourly wage declines. Scoring a pay increase at current levels is basically the last bullet to use against inflation, which left the cost of groceries 20.7 per cent higher in September than the same month in 2021.
A reader asked the other day about why prices remain high, even as inflation has declined to a tame 1.6 per cent in September from a peak of 8.1 per cent in June 2022. “What’s the economic reason why prices never revert to their former levels?” she asked.
Winning the war on inflation means keeping future price increases around 2 per cent, not outright price declines. Falling prices signal deflation, which is as much a problem as inflation. Deflation means a contracting economy and can often bring a worsening spiral where people stop spending as they wait for further price decreases.
Price cuts resulting from intense competition in a particular sector would be most welcome – in the grocery store, for example. But the best hope for your household financial stress isn’t price cuts – it’s pay hikes.
Statistics Canada says the average hourly wage increased 4.6 per cent on a year-over-year basis in September, compared to 5 per cent in August and 5.3 per cent in January. What’s happening here is the workers are getting pay hikes to offset not the current inflation rate, but past increases in the cost of living.
This won’t last, as you can tell from the slowing pace of wage increases. Employers will be able to point to the newly slimmed down inflation rate, and some may claim a degree of financial stress as economic growth slows. For now, though, the window on inflation-beating wage increases has not yet closed.
A 4.6 per cent wage increase today would give you an after-inflation gain of 3 per cent, which is quite good in historical terms. In June 2022, the average hourly wage increase of 5.2 per cent left workers with an after-inflation wage cut of 2.9 per cent.
An inflation-beating pay increase won’t backfill the hole in your finances created by high inflation, but it will give you some flexibility in the years ahead. Is there anything you can do in your job to convince your employer you’re worth more money?
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Rob’s personal finance reading list
The rise of garbage clothing
This article says we’re in a golden age of garbage clothes. The average garment is worn just seven to 10 times, yet global clothing production has pretty much doubled since 2000. If the Buy Nothing concept resonates for you, clothing might be a good place to start.
Canadian dollar daze
Analysis of whether the Canadian dollar will continue to fall against the U.S. buck, an issue for snowbirds and people planning U.S. vacations. Aggressive rate cutting by the Bank of Canada is to blame. Investors, a falling loonie argues against buying mutual funds and exchange-traded funds with currency hedging.
Want a house? Park your car
Lots of numbers to document how forgoing vehicle ownership can help you afford a home. You probably know from reading this newsletter that I think people are spending an awful lot on the vehicles they buy.
Little by little, or all at once
Pros and cons for investing in a lump sum, or averaging in with multiple purchases. Worth a look if you’re nervous about stocks after a monster year.
Podcast fans
Subscribe to Stress Test on Apple podcasts or Spotify.
Reader comment
“Just letting you know that Neo Financial is also dropping their rates from 4 per cent to 3 per cent as of Nov 1st.”
I rounded up recent changes in savings rates in a newsletter last week.
Do you have a question or comment for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Tools and guides
Introducing Butterfly, a budget app for newcomers to Canada. Developed by Credit Canada, a non-profit credit counselling agency, Butterfly can be used in Hindi, Spanish, English and French.
In the social sphere
Social Media: A must-read X thread for parents or grandparents who want to set up an investment account for a minor child using an in-trust-for account.
Listen: A podcast one of the tricker topics in personal finance, how to best build and then draw down on a registered education savings plan.
Money-Free Zone: As a kid, I had one of those K-Tel compilation albums with the song Blue Collar by Bachman Turner Overdrive. Hated the tune back then, but love it now. So cool and jazzy.
More PF from The Globe
- Child care is getting cheaper in Canada but parents stuck in daycare deserts are still left stranded
- If we’re in an affordability sweet spot, why aren’t aspiring homebuyers jumping in?
- What you need to know before helping your child with a home down payment
- Holding lots of cash is a fake security blanket, but you won’t know it until you retire
- The importance of setting money aside to pay final taxes and debts in an estate