Inflation Explained

Inflation is a fundamental economic phenomenon affecting individuals and businesses alike, particularly in the realm of real estate and mortgage services. As a dedicated mortgage broker based in Calgary, we seek to enlighten our valued clients about the causes, impacts, and measures surrounding inflation, with a focus on the Bank of Canada’s role and strategies in maintaining price stability across the country.

What is Inflation?

Inflation is the rate at which the general level of prices for goods and services rises, consequently eroding purchasing power. It is an essential metric for Canadians, influencing the cost of living, interest rates, and indirectly, the dynamics of the mortgage market.

Causes of Inflation

Inflation can be attributed to several causes, primarily:

  1. Demand-Pull Inflation: This occurs when the demand for goods and services exceeds their supply.
  2. Cost-Push Inflation: Arises when the costs to produce goods and services increase, typically due to higher prices for raw materials or wages.
  3. Built-In Inflation: This is driven by a cycle of rising prices and wages, where the increase in wages leads to higher production costs and subsequently, higher prices.

The Bank of Canada and Inflation Measures

The Bank of Canada utilizes various tools to monitor and control inflation, with a keen focus on two principal measures:

  1. Consumer Price Index (CPI): The CPI measures the average change in prices that Canadian consumers pay for a basket of goods and services.
  2. Core Inflation: The Bank also monitors measures of core inflation, including CPI-trim, CPI-median, and CPI-common, which exclude volatile components from the CPI to provide a clearer picture of underlying price trends.

Currency Exchange and Its Impact on Inflation

The value of the Canadian Dollar (CAD) in the foreign exchange market plays a pivotal role in influencing inflation. A stronger CAD makes imports cheaper, exerting downward pressure on prices, whereas a weaker CAD does the opposite, contributing to inflationary pressures. Exchange rates impact the cost of imported goods and services, which in turn, affects the overall price level in Canada.

Tools to Control Inflation

The Bank of Canada employs several strategies to manage inflation effectively:

  1. Interest Rate Adjustments: By manipulating the overnight rate, the Bank influences the general level of interest rates in the economy, thereby affecting spending and saving behaviour.
  2. Open Market Operations: Through buying and selling government securities, the Bank can adjust the supply of money in the economy.
  3. Reserve Requirements: By altering the reserves that banks are required to hold, the Bank can influence the lending capacity of banks, thereby impacting inflation.

Targeting 2.0% Inflation

The Bank of Canada aims for an inflation rate of 2.0%. This target is at the midpoint of a 1 to 3 percent inflation-control range, fostering a stable and predictable price environment. By achieving this target, the Bank supports sustainable economic growth, employment, and the overall well-being of Canadians.

Maintaining a stable inflation rate is critical for various economic activities, including borrowing and lending. For prospective homebuyers and mortgage seekers in Calgary, understanding inflation’s implications is essential for making informed financial decisions.

Inflation is a multifaceted economic element, intertwined with the workings of the Canadian economy. By staying informed and understanding the Bank of Canada’s strategies and goals, Canadians, especially those in the real estate and mortgage sectors, can better navigate the financial landscape and plan for a secure future.

For more information on how inflation impacts mortgages in Calgary, or to discuss your mortgage needs, feel free to contact us.

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Josh Tagg has been the owner of Mortgages For Less since 2006. During that time Josh has developed a reputation for being an industry leader and advocate for client education.