Inflation is the rate at which prices rise over time. If your money sits in an account that earns less than inflation, it grows on paper but buys less each year.
What the Bank of Canada aims for
The Bank of Canada targets 2% inflation, the middle of a 1% to 3% range. The idea is to keep prices rising slowly enough that people can plan, while staying clear of zero, where falling prices can cause their own problems. Actual inflation moves around that target, sometimes well above it, as it did in 2022.
What it does to $1,000
Here is how much of today’s buying power $1,000 keeps after ten years at different yearly inflation rates.
| Inflation | $1,000 today buys what this much would buy in 10 years |
|---|---|
| 2% | About $820 |
| 3% | About $744 |
| 4% | About $676 |
Looked at the other way, something that costs $100 today would cost about $134 in ten years at 3% inflation.
Real return
What matters is your return after inflation. If a savings account pays 2% and inflation is 3%, your real return is roughly negative 1%. The balance goes up and the buying power goes down.
Ways people try to keep up
- High-interest savings accounts and GICs. Low risk, and rates often rise when inflation does, though not always enough to beat it.
- Stocks and stock funds. Over long periods, shares have historically grown faster than inflation, but with large ups and downs along the way. Keep money you need soon out of them.
- Tax-free accounts. In a TFSA you keep all of the return, which helps your real return.
- Paying off debt. Clearing a loan at 6% or more is a guaranteed return.
- Raising your income. Often the most effective of all, and not an investment decision.
Keeping cash in the right place
An emergency fund should stay safe and easy to reach, not chase returns. Inflation is a reason to avoid holding more cash than you need, not a reason to put emergency money in volatile assets.
Long-term effects
Inflation is one reason long-term growth matters. See how time and regular contributions work together in how compound interest works.
FAQ
Is some inflation normal?
Yes. Central banks aim for low, steady inflation, not zero.
How is inflation measured?
In Canada, mainly through the Consumer Price Index, which tracks the cost of a typical basket of goods and services. Your own spending may differ from the average.
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This article is for general education and is not financial or investment advice. Figures and rules change, so check current information and consider speaking with a licensed professional before you act.
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