Inflation and the Bank of Canada Duking It Out On a Subway Platform Last Saturday Night...
In Part 1, we talked about why we got into this inflationary cycle and why it’s so important in the long term for us to get on top of inflation as best we can.
We examined the factors leading to this and saw that the government didn’t cause this, it’s actually down to my high school friend Dave and his post pandemic spending spree. He could have been a dutiful Canadian and kept his pandemic savings in an account somewhere but instead, he reacted to being locked in his room and went out and spent the money on a good time.
So how does the Bank of Canada intervene and manage the inflationary cycle? They can’t actually tell Dave to stop spending his hard won cash, can they?
Well, they do it by increasing the cost of borrowing to the point where Dave can’t afford to finance his purchases. Say he’s thinking about using $20,000 of his savings to buy himself a new Tesla, not one of the dinky ones, but one of the dual motor Model S versions ( Dave likes it in Red ).
Dave talks to one of the finance guys and they tell him because of the changes in interest rates, his payment might jump from $1200 to $2400 per month. Dave works at a good job where he’s considered to be a smart, hard worker – and not insane – so he decides to keep his savings in his cookie jar for now.
Simply put, the Bank of Canada tries to cap inflation by making it more costly for us to borrow money – not just individuals like Dave – but also for the pandemic proof companies that flourished and are now looking to spend all the extra cash they made during the pandemic.
You can likely expect another rate increase in September but there is some good news in June’s inflation numbers, which were slightly lower than expected and in key areas, quite a bit lower. It indicates we’re on the right track.
As a country, we also have the distinct advantage that we only have to manage Dave’s spending habits. In the States, they’re wrestling with Dave’s 10 cousins, partyers, who all saved a similar amount (but in American dollars)!
My sincere thanks to @samrowleywild for allowing me to use his excellent image.
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