Just What Is Inflation?

Just What Is Inflation Edmonton

It’s frustrating to try to understand inflation, interest rates, and home prices. 

You have to guess how they work together.

It can affect when you might buy or sell your house in Edmonton.

In Canada and around the world we’ve been hearing about inflation for months. In Canada, the United States, and other markets, the inflation rate is said to be the highest in decades.

As far as the real estate market is concerned, one side effect of the government’s efforts to control inflation is higher interest rates, which make mortgages more expensive and buying new homes more difficult.

However, you may be asking: just what is inflation?

In everyday English, inflation would just refer to the increase in the price of goods and services. But just because milk, gasoline, or wages have increased doesn’t necessarily mean that inflation is increasing.

When the government refers to the “inflation rate”, it’s referring to a measurement of how prices are increasing in the economy as a whole, not individually. If eggs are more expensive in September than in August, it doesn’t necessarily mean that inflation is afoot. However, if eggs, corn, asphalt, lumber, computers, and shoes are all more expensive, month after month, then it’s more than likely that the inflation rate is high.

The government calculates inflation by picking a “basket” of different goods and looking at the average of their price increases month over month. If prices for every item in the basket are 5% more on average in January than in February, then the inflation rate would be announced to be 5%.

The government picks this basket based on the core goods used by Canadian consumers. It also excludes certain necessities because their price can fluctuate so wildly. For example, gas and fuel are usually excluded, because wars, natural disasters, and other international incidents can affect their prices so much.

This means that the key metric for the Bank of Canada is really this “core inflation” (without gasoline and food). If “core inflation” is increasing month over month, or staying stubbornly high(the Bank’s target is just 2%) then watch out! Interest rate hikes are probably on the horizon.

Tim Grover – September 24, 2022

 

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