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Inflation: How It Impacts Your Money

Why haven't most young adults gotten around to buying a house yet – as they'd expected they would by age twenty-five – for that matter? Why are people who own houses, cars, and kids getting emotionally choked-up at the gas station about the cost to fill up their car? Aren't they supposed to be financially care-free by now?

The reason for these unwanted changes is largely due to inflation.

Inflation is the increase in prices over time. The consequence being that a unit of currency can buy less than it once could. Inflation is typically preceded by more specific changes in: cost of materials, cost of labour, taxes (falling or rising) and exchange rates (falling or rising). Aside from the immediate issue of having to pay more for common expenses, inflation is also bad for your savings. When inflation is low, you can scale what your money will be worth in the future. When inflation is high and unpredictable, the value of your saved money is decreasing, which obscures your ability to know if your savings will be enough to pay for a house, or have a comfortable retirement.

Policymakers have wondered why inflation managed to stay so low for so long. Aside from a few glitches in the system (i.e. the 2008 financial crisis), the period between the 90s and 2020 was a time when economies were generally quite strong, and unemployment was low. The inflation rate hovered around two percent per year – a rate low and predictable. For those living in developed countries, quality of life improved, as well as material possessions.

Considering that the last thirty years has been a period of prosperity, it could be that the financial storm of the last two years is metaphorically alike to the chickens coming home to roost. Inflation may have stayed steady because the amount of supply matched the amount of demand. We don't know why, just that it has not been a problem until recently.

In January, inflation hit a three decade high. In more explicit terms, inflation has exceeded five percent – something that hasn't happened since 1991.

Most people understand that inflation is, to a degree, inevitable. And at two percent, the increases are mostly unnoticeable and manageable. At five percent, the increase becomes, naturally, quite the opposite.

The Reserve Fund

Some areas of the market have shown symptoms of change without the source of that change - inflation - being mentioned. One such area where the effects of inflation are causing damage but is scarcely mentioned is in regards to condominium reserve funds.

The Condominium Authority of Ontario recently published a document titled 'Ensuring Healthy Reserve Funds'. It was thirty-nine pages, and the word 'inflation' came up twice. Strange, considering that high inflation is a principle reason why more people are talking about reserve funds right now.

Recent data have shown that the money saved in most condominium reserve funds is not high enough to cover its future expenses without requiring large unplanned contributions from owners and/or special assessments. What should you do?

Many large investors often look to invest portions of their portfolio in inflation linked investment products when they become concerned about rising inflation rates.

Unfortunately, condominium reserve funds are not able to access any inflation linked investment products. The investment products that a condominium corporation can purchase within their reserve fund is articulated by the condominium act. While it is quite limited, the rules are in place to protect condominium owners from bad investment decisions.

The reality is that sometimes all you can hope for is better foresight. If you can't control inflation, then you can at least try to predict it and plan accordingly. Vertical City Institute's published tools give its users the ability to forecast a more accurate project of future expenditures by simulating a range of possible inflation rates. This range gives users a better idea of what happen to their expenditures, their cash and their reserve fund in the future.

What's the Point?

Most of the time, the inflation rate's yearly increase is about as noticeable as the global rise of sea levels. Many people are aware of it, some people may even go protest outside City Hall, contact their local government official, and seek action – but most won't. The implications of inflation are worrying, and most people feel powerless to do much about it. But what people can do is adapt, fine-tune, and make small adjustments. Particularly if you are a member of a condominium board or corporation in which case we encourage you to speak to your financial advisors about how to adapt and make adjustments.


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