How Inflation and Interest Rates Increase Affect You and Your Investments

Inflations rates have risen to record highs in the past months. If you’ve never really thought about how inflation affects you, here’s a simple way to break it down.

Inflation rates measure how much more commodities and services cost compared to the previous month and year. For example, if the price of your favorite snack increases from $10 to $15, it is very likely, that this cost increase is due to inflation and higher costs incurred to make the same snack.

Governments do not rely on only one commodity to calculate the inflationary increases in prices, they use a basket of commodities and services to capture better how costs are increasing. Inflation rates are measured using the Consumer Price Index, also called the CPI.

The CPI captures costs for food, shelter, gasoline, transportation, energy, recreation, clothing and footwear, education and reading, household operations, furnishings and equipment, health and personal care, alcoholic beverages, tobacco products, and recreational cannabis. You can find the extensive list of what is included in the Consumer Price Index here.

The past months’ CPI index has shown that prices are increasing significantly, leading to inflation concerns. Year-over-year Inflation rates increased to 7.6% in July, the same period last year, the inflation rate was 3.7%.

Higher inflation rates have been attributed to supply chain issues and the war between Ukraine and Russia. Others have blamed the Covid-relief funding for increasing money circulation and demand for goods and services.

Whatever the cause may be, the average Canadian is experiencing the harsh realities of inflation. If you went grocery shopping in July 2021 for selected grocery items listed below, this is how the average prices compare to the same period in 2022.

Grocery ItemsJuly 2021July 2022Difference
Dozen eggs$3.82$4.29$0.47
Oranges per kg$3.66$4.67$1.01
Chicken breast per kg$12.58$15.94$3.36
Sweet Potatoes per kg$3.86$4.18$0.32

Source: Statistics Canada

For the same items, higher inflation rates make you pay an average of $5.16 more. In summary, rising inflation rates increase your cost of living and leave you with less money to save or invest.

The Canadian government has been increasing interest rates since January 2022 to control rising inflation. The Bank of Canada (BOC) increased the policy interest rate from 0.25% in January to 3.25% in July. The major goal of increasing interest rates is to curtail consumer spending with hopes of reducing demand and prices of goods and services.

Higher interest rates are making loans more expensive for individuals and organizations. On the consumer end, if you took a mortgage with a 5-year fixed interest rate of 2.1% in July 2021, you would be borrowing at a cheaper rate compared to a similar mortgage in July 2022 with interest rates of up to 4.5%.

Suppose interest rates keep rising, renewing your mortgage with a balance of $300,000 at an average of 5% will now cost you about $1,745 monthly compared to the $1,285 you would have paid at the lower interest rate. Higher interest rates will make you spend $460 more for the same mortgage balance.

Similar to the effect of higher inflation on your disposable income, higher interest rates cause you to have less money for other financial goals.

Higher inflation and interest rates also impact your investments in stocks and bonds. Generally, when interest rates increase, the prices of bonds fall, and

yields increase. Similarly, investing in other fixed-income assets such as mortgage funds or guaranteed investment certificates (GICs) can result in higher yields as interest rates increase.

The stock markets have experienced bearish prices since the beginning of 2022 as companies also battle higher operations costs and corporate loans.

The S&P 500, an important global stock index, fell 17.02% year-to-date. The bearish markets have been a combined outcome of the global supply chain challenges, the European war, rising interest and inflation rates, and contracting economies.

What can you do to manage your investment portfolio in times of rising interest and inflation?

There is no one-size-fits-all approach to managing investment portfolios, as people have varying investment goals. However, a long-term investment strategy enables you to desist from sentimental sell-offs, and investment diversification allows you to manage risks effectively.

Investing in fixed-income assets or stocks requires adequate research and expertise to make the most of the possible returns in the financial markets.


Statistics Canada:

Bank of Canada: rate/