Inflation: How It Impacts Your Money

Why haven't most young adults gotten around to buying a house yet? In recent years, the average age of first-time homeownership has been rising, while overall homeownership rates have declined. Meanwhile, those who already own homes, cars, and support families are feeling the strain—whether it's at the gas pump, the grocery store, or in everyday household expenses. Wasn’t financial stability something they expected to have achieved by now?

The reason behind these financial pressures is largely inflation.

What Is Inflation and Why Does It Matter?

Inflation is the gradual increase in prices over time, reducing the purchasing power of money. It’s driven by factors such as material costs, labour expenses, changes in taxation, and currency fluctuations. While inflation is a normal part of the economy, both high and prolonged inflation can create financial challenges. When inflation is low, price increases are manageable, and financial planning is easier. But when inflation is high and unpredictable, it erodes savings and makes major financial goals—like homeownership or retirement—harder to achieve.

Aside from occasional economic disruptions (such as the 2008 financial crisis), the period between the 1990s and 2020 was marked by relative stability, with inflation hovering around 2% per year. This predictability contributed to economic growth, low unemployment, and rising material wealth. However, by January 2022, inflation surged past 5% in Canada, hitting its highest level in three decades. At this level, it quickly starts to hit the wallet—monthly budgets tighten, and everyday expenses become harder to manage.

The Impact of Inflation on Reserve Funds

Inflation doesn’t just affect personal finances—it also puts pressure on condominium reserve funds, which are used to cover major repairs and replacements for shared building components. Despite inflation being a key financial concern, it is often overlooked in discussions about reserve fund management.

A report from the Condominium Authority of Ontario, titled Ensuring Healthy Reserve Funds, dedicated 39 pages to this issue but mentioned inflation only twice—despite it being a key factor in today’s reserve fund concerns. Meanwhile, data from the Office of the Auditor General of Ontario has revealed that many condominium reserve funds are underfunded, meaning they may struggle to cover future expenses without unexpected fee increases or special assessments on condo owners.

Can Reserve Funds Protect Against Inflation?

Many large investors use inflation-protected investment products to hedge against rising costs. Unfortunately, condominium reserve funds face strict investment restrictions under the Condominium Act, which limits their ability to use these financial tools. While these regulations are designed to protect condo owners from risky investment choices, they also prevent reserve funds from growing at a rate that keeps pace with inflation.

Since inflation is largely beyond individual control, the best approach is foresight and proactive financial planning. Tools like the Vertical City Toolkit allow condominium boards to simulate different inflation scenarios, providing a clearer picture of future expenditures, cash flow, and reserve fund health.

What Can You Do?

For most people, inflation is like the slow rise of sea levels—it happens gradually, but its impact is far-reaching. While individuals may not be able to stop inflation, they can adapt by making informed financial decisions and adjusting their plans accordingly. If you are part of a condominium board or corporation, speaking with a financial advisor can help you develop strategies to navigate these economic challenges more effectively.