It’s been nearly ten years since the penny was cut out of circulation, and yet it seems many of us are counting every last cent nowadays as we try to stretch out our paycheques and make our money last.
A majority of Canadian families have felt the weight of increased inflation and heightened interest rates on their day-to-day lives. According to a recent survey by Yahoo Canada and Maru Public Opinion, 39% of Canadian respondents are feeling very anxious about the added financial pressure stemming from rising interest rates, and 18% are “worried sick” about their financial future.
Whether you’re personally feeling the crunch or not, it’s hard not to notice how expensive everything has gotten in the past few months. From gas, to groceries, to eating at restaurants, finding affordable housing, or keeping up with increased mortgage payments.
All these things are adding up, penny by penny, to the point where a lot of families are worried about being able to afford their daily necessities.
The affordability crisis
It’s been a long time since we’ve seen this level of inflation or interest rate hikes. In September of 2022, inflation hit a 40-year-high, and interest rates have risen six times in Canada since March. The increases have nearly all been more than the usual 25bps seen in recent decades.
“Most people don’t remember a time when the cost of living was rising this quickly,” says Jason Heath, a certified financial planner and managing director of Objective Financial Partners Inc.
The value of money has decreased significantly in the past year. That’s making things like budgeting, or managing debt much more important, especially for people who are used to getting by without worrying about their finances. Those who were just getting by are definitely more concerned.
According to an October 2022 survey, 65% of Canadians have set stricter budgets and reduced their spending; this is up 11% from June’s numbers. In addition, one in five Canadians are eating less than they should in order to make ends meet, according to Food Banks Canada.
Housing prices have also notably increased. According to a report by Rentals.ca, the average rental cost for traditional rental apartments was up 11.8% from September of last year.
In the U.S., the affordability crisis is also taking its toll. The increased cost of living has many people looking for ways to supplement their income. According to Bloomberg, over half of American workers have considered getting a second or third job to offset the increase in their cost of living.
Why is the affordability crisis happening?
The affordability crisis isn’t just a Canadian problem, and it goes far beyond being an American problem.
“A lot of things are impacting us far beyond our borders,” says Heath.
The affordability crisis right now is directly tied to inflation and rising interest rates.
It is a global phenomenon, partly due to things like the war in Ukraine, and lingering logistical issues that resulted from the pandemic.
In many ways, the crisis is a supply and demand issue.
“Inflation is caused by too many dollars chasing too few goods. And that’s exactly what happened after COVID. People had banked all this money (partly because of stimulus cheques, partly because they weren’t going out and spending it), but then they were able to start spending, and that’s what they did,” says Coleen Clark, professor emerita from Toronto Metropolitan University.
All that rapid spending, in an environment where too few goods were available, started pushing prices up.
Many economists argue that central banks acted too slowly to prevent rapid inflation, but managing it is a tricky balancing act that pits losing jobs against possibly triggering a recession.
Some economists also wonder whether earlier, sharper, and more intense rate hikes would’ve made any difference at all.
For example, The Economist recently published an article showing data from eight countries, all of which began raising interest rates a year ago after having slashed them to historic lows early in the pandemic. The data shows these countries’ economies are not faring better, and their core inflation reached 9.5% on average in September 2022.
Meanwhile, while inflation has dropped from 8.1 to 6.9 percent in Canada (as of the end of October), the decrease is happening too slowly for many.
The Bank of Canada has vowed to continue managing its monetary policy (and continue raising hikes) to rally down inflation.
“How much further will depend on how monetary policy is working to bring down demand, how supply challenges are resolving, and how inflation and inflation expectations are responding to this tightening cycle,” said Bank of Canada Governor Tiff Macklem, at the end of October.
“As the economy responds to higher interest rates and as the effects of elevated commodity prices and supply disruptions fade, the Bank expects inflation to fall to about 3% in late 2023, then return to 2% in 2024,” says the Bank’s latest monetary report.
Inflation and the CPI
Inflation is driven by a number of factors – from commodity prices and supply-related disruptions, to outside factors which are more unpredictable. But how inflation affects the cost of living can be measured by the Consumer Price Index (CPI), which breaks down the change in prices experienced by Canadian consumers.
The CPI basket divides goods and services into eight major components: Food; Shelter; Household operations and furnishings and equipment; Clothing and footwear; Transportation; Health and personal care; Recreation, education and reading; and Alcoholic beverages, tobacco products and recreational cannabis.
The changes in prices within these components varies widely. For example, food and shelter prices have increased 10.3% and 6.8% respectively. Transportation has increased 8.7%, but food and clothing prices have only increased 1.5%.
Who is most affected by the affordability crisis?
What the price changes in different components of the CPI trickles down to on an individual level will depend on a person’s individual financial situation. The affordability crisis isn’t affecting everyone the same.
Radical increases to food and shelter will have a deeper impact on someone’s life when a majority of their paycheque is spent on these high-ticket items.
“Richer people will not be affected (as much) by any of this. They will just have a couple of million less for their retirement, but if they’re patient and they can, they will just ride the wave,” says Elke Rubach, a principal with Toronto-based wealth management firm Rubach Wealth.
Meanwhile, precarious workers are facing the brunt of the affordability crisis.
“Low wage workers, precarious workers, the very same people we called central workers throughout the pandemic, are needing to work two to three jobs to make ends meet,” says Rejean Hoilett, digital organizer and communications coordinator at Workers’ Action Centre.
Hoilett says the lack of sufficient protection for these workers is forcing them to make very difficult decisions between taking care of their health and their family, and staying afloat financially.
For example, Workers’ Action Centre dealt with an extreme case, where a worker with diabetes couldn’t afford to take time off from his jobs to attend his medical appointments.
“So they had to get their leg amputated,” says Hoilett, adding that this is just one example of the knock-on effects of the affordability crisis.
At the end of the day, people have to make choices with the resources they have, and Heath says, those decisions should begin with understanding their spending.
“There’s a lot of low-income individuals in expensive cities who are under a lot of pressure, and it’s become that much more important to budget or cut costs. Most people have more control over their spending than their income,” he says.
Hoilett disagrees. He says that for those with limited financial means, those choices are typically harder.
“No level of budgeting is going to change the situation for people who are living paycheque to paycheque,” says Hoilett. So for him, addressing the affordability crisis begins with making better policies at all government levels that protect Canadians and our economy.