No, Dave Didn't Spend His Savings On This...
You’ve likely been seeing a lot about inflation lately and probably also understand a bit about how it affects you when you shop for groceries and gas, especially.
But if you don’t understand how it happened, here’s a hugely simplified version of how we got here.
About two and a half years ago, we were sent home and told to stay in our rooms. The predictions of collapse were dire and there was lots of speculation that society would change forever, as well as some wild conspiracy theories flung around.
There were also a couple of economists who rightly predicted that the economy would not fail and although it would be a challenge, recovery would come.
A funny thing happened. A lot of people, found they had pandemic proof jobs, that they could relatively easily work from home. Employers quickly adapted because they had to. Some, like the banks, already some of their folks working from home so for them transitioning to most working doing the same wasn’t as big a deal as you might have thought.
Many without pandemic proof jobs quickly found work within other industries that were still looking for workers.
Then a funny thing happened, people like my friend Dave, who works in a downtown office normally, started saving money. Money on lunches out, money on business trips, all the money he when would normally spend outside of his regular home expenses. Dave ended up with a significant amount of savings that was burning a hole in his pocket.
Just like the rest of us, once the doors opened and the sun shone again, Dave went and spent his hard saved dough- on a trip, as a down payment on holiday home, on a new car. Just like the rest of us.
The problem is, with everybody spending their hard saved money the economy, which had slowed during the lockdown, is now being forced to go from 20 to 80, because of all the fresh cash that’s being injected. The increased demand is causing supply shortages and increasing production costs, more particularly for the businesses that weren’t pandemic proof are now trying to get back the staff they lost to catch up with production.
Inflation being where it is now causes more alarm for the government, because they don’t want us to become used to this level of inflation -annual inflation rates we have now would be 80% over ten years, something we obviously won’t be able to manage.
By raising rates, the Bank of Canada is trying to encourage us to stop spending. If we do that, then inflation will cool and we’ll be able to afford a pound of cherries next summer.
As I said, this is a wildly simplified version of what’s going on, so if you have any questions or want to chat further about it, don’t hesitate to give me a call.
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