Who Really Bears the Brunt of Inflation?

By Ryan Goldsman, CFP®, PAIP®

            In August of 2021, Canada’s inflation crossed 4% for the first time in a long time. What that means is that when comparing a basket of goods from August 2020 to August 2021, the cost of the same basket of goods increased by a rate of 4.1% (to be exact). But there’s more; the fun didn’t stop there. Instead, inflation continued its upward trajectory to hit a high of 8.1% in June of 2022, and came in at 6.8% for the 2022 calendar year.

            Although 6.8% inflation is far above the Bank of Canada’s target of 1% to 3% per year, Canadians need to stop and ask themselves who really pays for inflation? Although it impacts everyone, including kids at the candy shop, there are certain groups who are more easily able to pass on the costs to consumers, while other companies have no other choice but to absorb it themselves.

            For companies that are lucky enough to provide a necessity (or an addiction), then the price increase can more readily be passed onto the buyer. In spite of losing a small number of buyers, the price increase will more than compensate for the losses. Examples include food, heating, and cigarettes.

            Companies that provide items or services which are not necessities, such as home cleaning services, recreational vehicles, and many restaurants, then the question of “how much of these costs can we pass onto the customer?” becomes much more difficult to answer.

            The good news for consumers is that many of their expenses can be reduced, altered, or potentially avoided altogether. Dinners out, and several different streaming subscriptions can often be reduced. The problem brought on by inflation however is much more complicated than what an average employee must face.

            Following a period of high inflation, employers are often very happy to provide a salary increase to their staff members, often exceeding their expectations. This is to ensure that their standard of living remains consistent. The problem however, is that most employers offer increase no more often than once a year, and it’s only after inflation has squeezed too many people for too many months.

            Any salary increase is good news, but it often comes a year too late. How are those on a fixed salary (or fixed-income) staying ahead of inflation is the increase comes only after the inflation is felt?

            Following a salary increase, they may be back on par, but for how long? Inflation rarely falls drastically back to zero following a sharp increase. Instead, it often takes several periods of declines to reach a more manageable level.

            We’ll have to wait and see what 2023 has to offer.