According to Statistics Canada, our annual inflation rate has remained at 1.2 per cent for the past several months. This is good news, as it continues to support reasons for the Bank of Canada keeping the interest rate so low, and the increase isn’t really so much that consumers need to be worried. But inflation isn’t always a bad thing meant to be feared. In fact in some cases, such as when you own a home, inflation can be a good thing.
It was in the 1970s after all. During this decade the Consumer Price Index shot up by more than 10 per cent, and so did interest rates. This put a greater burden on consumers, especially homeowners that were paying a variable interest rate. At a time when the price of everything was going up, so too was the total amount of their debt. Yet, it was also during this time that other homeowners and owners of other hard assets, such as gold and other precious metals, were sitting pretty.
This is because while those hard assets appreciated in price, the true value of other assets borrowed with a fixed interest rate went down. And so those who were paying a fixed mortgage actually saw the debt on their home go down – while the value of their home went up.
In fact, pulling values back up again is yet another benefit that comes with inflation, and this is something that has been more recently seen in the United States. While many of these homes still have underwater mortgages on them, inflation has helped add to the value. This helps add to the equity in a home, and that can eventually pull a homeowner out from underwater, and get their heads back above it once again.
Inflation can also help landlords garner more profit through their rental properties. This is because when inflation jumps, rents usually go along with it. And if that landlord has purchased that property with a fixed mortgage, his debt remains the same while his profit goes up.
The term fixed is extremely important when you’re talking about inflation being a good thing for debts. This is because when debt is set on a variable rate, that rate can move up and down with interest rates. If inflation jumps, the interest rate will go up, and consumers will be left paying more debt and more for consumer items. With a variable rate, debt continues to keep its true value, while with a fixed rate it does not.
Another interesting factor that inflation could help us with is our public debt and our deficit. With inflation often comes higher taxes from the government too, which brings them more surplus in taxes and frees them up to pay off more debt. However, with every winner comes a loser, and using inflation for this purpose doesn’t always work. In fact recently, the government of the United Kingdom recently pointed towards inflation as the main reason behind their very large deficit.
Inflation in general is not a great thing. It causes us to pay more for whatever we need or use, and that’s why the government keeps such a close eye on it. But just like everything else, with inflation comes both positives and negatives and it’s important that consumers know about them. It may be the only way to protect yourself against it.