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Inflation and interest rates: What’s tipping the scales?

Building your savings strategy involves making assumptions about spending habits, market fluctuations, and expected returns. In today’s economic climate, with these factors changing almost daily, what predictions can we reliably make? Chan Huynh, Senior Wealth Advisor at SCU and Credential Securities, says there are two important factors to account for right now: Interest rates and inflation.

“On one hand, rising interest rates makes it seem like Christmas for investors, because you’re finally getting higher rewards for your savings,” said Huynh. “But remember that you also need to balance this with inflation.”

Let's talk inflation

To start, it’s important to establish that inflation itself isn’t a bad thing. Stable inflation is good for the economy, since rising prices encourage consumers to buy products now, rather than waiting until later. Ideally, central banks prefer to keep inflation close to 2%. This keeps the economy stable without eroding your purchasing power too dramatically.

However, inflation hurts the economy when it gets too high — which is the reality Canada is facing right now. As of May 31, 2022, inflation is sitting at 6.8% — the highest it’s been since 1991. Put simply, Huynh explained, this is because the demand for goods and services far outweighs the supply. You’ve probably already noticed the rising prices in the grocery line and at the gas pump, but you may not realize it’s also decreasing the power of your investments.

By raising interest rates, the Bank of Canada hopes to slow inflation down, and lessen the chances of an economic recession. “If we do run into a recession, we want to have a soft landing, not a crash,” Huynh explained.

What does this mean for me?

In order to illustrate how these factors might affect your financial plan, Huynh described a conversation he recently had with a member. Huynh recommends members meet with him at least once a year to check in on what goals they’re trying to reach, how their habits and behaviours affect those goals, and what concerns are keeping them up at night.

“Discussions around specific products come later,” said Huynh. “We can’t talk about tools until we know what we’re building.”

In their conversation, the member shared that he was concerned about how rising inflation would affect his long-term portfolio. Not only that, but higher interest rates and an increased cost of living was making it more difficult to pay down vehicle and education debt in the timeframe he originally planned.

First, Huynh recommended the member revisit his budget and prioritize his spending, so they could have a better understanding of what savings goals were realistic. Huynh also referred the member to a lending specialist to discuss how best to tackle his debts — without neglecting long-term planning.

In time, they settled on three major priorities: Staying on budget, paying down debt, and growing long-term savings. It was only once these goals were established that Huynh began to help the member explore what tools would best set him up for success. The member was concerned about market volatility, so they settled on investing part of his savings in short-term GICs to give him a guaranteed rate of return. Then, to make sure to account for inflation, and to be more tax effective, they invested another portion of his savings in the market.

By the end, the member was much more confident in his financial plan, and the steps he needed to take before
their next check in.

Of course, everyone’s financial situation is unique, and you may have different concerns keeping you up at night. “That’s why it’s so valuable to speak with an expert,” said Huynh. “That way, we can make sure the scales are tipping in your favour.”

We’re here to help you reach your savings goals, and make sure you’re getting the most from your money. Contact us to start the conversation.


Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.

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