From groceries and gas to housing and energy, inflation affects nearly every aspect of daily life. But how does inflation tie into interest rates, and what does this mean for Canadian households, businesses, and investors?
Let’s break down the relationship between inflation and interest rates and explore how these factors shape Canada’s economic landscape.
What Is Inflation?
Inflation refers to the rate at which the general level of prices for goods and services rises over time. A moderate level of inflation is a natural part of a healthy economy, signaling growth. However, when inflation surges beyond acceptable limits, it erodes purchasing power, making everyday essentials more expensive.
Canada measures inflation primarily through the Consumer Price Index (CPI), which tracks the price changes of a basket of commonly purchased goods and services. However, the metrics used to calculate inflation have been revised multiple times over the years, often leading to debate over how accurately it reflects the true cost of living.
Why Does Inflation Matter to Interest Rates?
The Bank of Canada (BoC) uses interest rates as a tool to control inflation. When inflation rises too quickly, the BoC increases its benchmark interest rate to curb spending and borrowing. Higher rates make loans, mortgages, and credit cards more expensive, which reduces consumer demand and slows inflation.
Conversely, when inflation is low or the economy is sluggish, the BoC may lower interest rates to encourage borrowing and stimulate economic growth.
Inflation Trends in Canada
Since the pandemic began, inflation has become a persistent challenge for Canadians. Factors contributing to high inflation include:
- Supply Chain Disruptions: Global supply chain issues have driven up the cost of goods, particularly imported items.
- Energy Costs: Rising oil and gas prices have had a ripple effect across the economy, increasing transportation and manufacturing costs.
- Housing Prices: Rapidly increasing real estate prices have made housing one of the largest expenses for Canadians.
Despite claims that inflation is stabilizing, many Canadians feel the pinch of higher costs, particularly in essentials like food and energy.
How Inflation Affects Canadians
Inflation doesn’t just affect the price of goods—it also impacts interest rates, mortgage payments, and investment decisions. Here’s how:
- Higher Borrowing Costs: When interest rates rise to combat inflation, Canadians face higher costs on variable-rate mortgages, personal loans, and lines of credit. Fixed-rate borrowers may also feel the impact when their terms renew.
- Reduced Purchasing Power: As wages often fail to keep up with inflation, households may find it harder to afford everyday expenses, let alone save for long-term goals.
- Impact on Real Estate: Higher interest rates reduce affordability for homebuyers, leading to slower real estate activity and potential price adjustments.
- Investor Decisions: Rising rates can also impact investment strategies, with bonds becoming more attractive relative to stocks during high-rate periods.
What’s Next for Interest Rates?
In 2025, many experts are divided on the future of Canadian interest rates. While some predict stabilization or even further reductions, others caution that inflation may still warrant rate hikes.
Key factors to watch include:
- Global Economic Conditions: International trade policies, supply chain recovery, and energy prices will all play a role in shaping Canada’s inflation outlook.
- Government Policies: Fiscal policies and potential tariffs could either alleviate or exacerbate inflationary pressures.
- Housing Market Trends: Continued shifts in housing affordability and demand will influence the BoC’s decision-making process.
How to Navigate Inflation and Interest Rate Changes
At Lendworth, we understand how inflation and interest rates impact your financial decisions. Whether you’re looking to refinance a mortgage, explore private lending opportunities, or invest in secure mortgage-backed assets, we’re here to guide you through these uncertain times.
By staying informed and partnering with experienced professionals, you can protect your financial well-being and take advantage of opportunities in a shifting economic environment.
Inflation and interest rates are complex, but they don’t have to be overwhelming. Stay ahead of the curve with insights from Lendworth, and let us help you achieve your financial goals.
Ready to explore your options? Contact Lendworth today.