Staying Afloat During A Period of High Inflation
In October, inflation rose 7.7 per cent in the U.S. and 6.9 per cent in Canada on a year-over-year basis. Meanwhile, hourly earnings only rose 4.7 per cent and 5.6 per cent in the U.S. and Canada, respectively, so earnings are not keeping up with prices. Unless you are one of the few lucky households where income is rising faster than inflation, higher prices mean you have less to spend or save overall. In addition to rising prices, many consumers may have less discretionary income due to higher interest rates boosting debt service costs.
Naturally, North Americans have been searching for ways to alleviate the budget impacts of inflation and higher interest rates. Below are four ways to combat inflation and higher interest rates so that you can maximize discretionary income over time.
- Track Your Spending and Cut Anything Unneeded. Yes, a budget! According to the Financial Consumer Agency of Canada (FCAC), less than half of Canadians keep a personal budget. Free apps, like this one, can help you get going. This is something that is beneficial even in normal/good times. When you have a good idea where your money is going each month, you have better capability to reduce spending on unnecessary expenses and potentially boost savings. Although Deputy Prime Minister and Finance Minister Chrystia Freeland was criticized for her comment that her family cut their Disney+ subscription because they no longer used it – later apologizing because the comment was from a “privileged’ position” – there is merit to cutting expenses when they are unnecessary or underappreciated. Another strategy is to negotiate away some of your household expenses – your cable, internet and phone bill are a good place to start, and telecom companies are known for cutting you a break so that you don’t “cut the cord” entirely.
- Keep Excess Funds Invested Where Possible. A few years ago, inflation was around two per cent, and GICs and high interest savings accounts (i.e., money market funds) yielded 0-1 per cent (i.e., next to nothing). Today, inflation is 7-8 per cent in North America, GICs yield 5-6 per cent, and high interest savings accounts yield 3-4 per cent. The cost of maintaining a zero-interest cash balance is now much more punitive as the purchasing power of cash is eroded at a more rapid rate. That said, beware of taking too much risk in your portfolio in this type of economic environment, especially with money you may need in the near future. The issues experienced in the crypto, cannabis and speculative technology markets show that downside can be extreme in this type of environment.
- Quantify the Effect of Higher Interest Rates. The rapid rise in interest rates has taken many households by surprise. Canadian households with variable mortgages have already seen their mortgage rates increase by 3.5 per cent so far this year. Some households maintain a home equity line of credit (HELOC), which allows them to borrow large amounts secured by the value of their home. HELOCs are variable rate second mortgages, and the interest rates on these loans have risen by 3.5 per cent in 2022 as well. For those with large variable rate mortgages or HELOC balances, the additional annual interest cost associated with higher interest rates can easily be in the thousands. In addition to loans that have already experienced a boost in interest rates, it is important to quantify the higher potential mortgage costs associated with any future mortgage renewals – if you maintain a fixed-rate mortgage – and plan for this increase in monthly expenses.
- Be Mindful of Interest Costs Associated with New Purchases. Financing the purchase of a car or a second property is much less appealing now than it was a few years back. Understanding the rising costs associated with your current debt load combined with anticipating the financed cost of any new purchases can help guide decision making around new purchases to ensure your budget doesn’t become too stretched in the future. Delaying big purchases, if possible, can help reduce financial stress if the budget is tight.
News and our views
- Inflation Cooling Down, Markets Heating Up. In October, U.S. inflation, measured by both the consumer price index (CPI) and producer price index (PPI), came in lower than expected. Despite U.S. inflation still at elevated levels and inflation likely to remain well above average throughout the winter due to high energy costs, equity and bond markets cheered the first glaring sign that inflation may finally be cooling. The growth-focused Nasdaq 100 rallied as much as 10 per cent in a week following the news, highlighting investor enthusiasm.
Our Take: Lower than expected inflation is a great sign and takes some of the pressure off central banks to continue rapidly raising interest rates. Fewer interest rate hikes ultimately mean less damage is done to the economy as part of this economic rebalancing. It will be important to watch for a continuation of this inflation trend as well as confirmation that the inflation rate is also falling in other countries. We will also want to watch to see why inflation is falling and if economic growth is holding up during this process.
- U.S. Midterm Elections – No Red Tsunami but a Split Government Nonetheless. Historically, low approval ratings for the Biden administration risked inciting a “red tsunami” whereby Republicans took overwhelming control of the Congress and at least contest control of the Senate. In actuality, Republicans took control of the Congress, but by the slimmest of margins, and the Senate was truly never in reach.
Our Take: Although Republicans underperformed relative to market predictions and many non-partisan forecasters, Republican control of the Congress will make it difficult for Democrats to pursue partisan policies as well as make it difficult or time consuming to pass any new legislation. Markets tend to perform better under split governments because these rarely shock markets with major regulatory or tax changes. Outside of rare moments of historic emergency, while building quick consensus in government is beneficial, split government is a net positive for markets.
Just for fun
- Black Friday is soon upon us. November 25, 2022, marks Black Friday and when we, procrastinators, start to consider our first holiday season purchases. Because retailors are dealing with bloated inventories this year due to supply chain issues and lower than expected consumer demand, we may see some deep discounts on Black Friday, Cyber Monday and beyond. Finder.com is a good place to start if you don’t exactly know what you’re looking for just yet.
- Elon Musk – EV Aficionado. Rocket Man. Sun-Loving Guy. Corporate Raider? Shortly after Musk took control of Twitter, he started cutting jobs like a lumberjack in a woodshed. According to some reports, he has cut nearly half of all jobs at the social media company in just a few weeks, something that is difficult to fathom. Perhaps Musk is tinkering as he would with his other pet projects. Our sympathies to those negatively affected by this historic corporate research experiment.
- Another 2-6 years of Trump?! Shortly after the U.S. midterm elections, Trump officially announced his intention to run for president in 2024. While this was not a big surprise, the thought of another Trump presidency brings back memories of how unnecessarily intense those years were. Ugh. Trump’s prospects for victory in 2024 appear to be at a low with a weaker-than-expected performance by the Republicans in the midterm election and increasingly popular Republican challengers like Florida Governor Ron DeSantis and Trump’s former VP Mike Pence posing a risk to Trump’s candidacy. Here’s to another two years of all day, every day bluster, and possibly another six if he gets his way.
- Remember when the internet was for sharing videos of animals doing silly things? We do! Visit this Twitter page for some serious gems.
- We are honoured to be included on the Report on Business magazine and SHOOK Research 2022 list of Canada’s Top Wealth Advisors – Best in Ontario list. Being ranked as one of the top teams in Ontario is independent confirmation of our success and commitment to our clients. The team at Steele Wealth Management is at the cutting edge of wealth management and client service. We are committed to putting our clients’ needs first, delivering exceptional client service and offering all advice and services with unwavering integrity. We would like to thank our clients for placing their trust in us.
