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Two Things that MASSIVELY Affect Everyone, Everyday
Have you noticed how everything in general has become more expensive recently? Do you want to know why?
Here’s a summary of the video above which explains the concept of inflation, interest rates, the relationship between the two and how it affects your purchasing power in five bullet points:
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Link Between Inflation and Interest Rates:
The video explains how inflation, which is the rising cost of goods and services, directly influences and is controlled by interest rates. The Bank of Canada aims to maintain inflation at around 2%, but current rates are closer to 7% due to various factors.
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Impact of Supply and Demand:
Inflation can result from supply-side issues (like rising costs of oil and wages) or demand-side pressures (increased consumer spending beyond what the economy can produce). These elements have been exacerbated by events like COVID-19, droughts, and geopolitical tensions.
The Bank of Canada uses interest rates to manage economic temperature; lowering them to stimulate spending during slowdowns and raising them to cool off an overheated economy. This was demonstrated when rates were cut to near zero at the pandemic’s onset to boost spending.
- Challenges of Current Inflation:
Today’s inflation is significantly driven by supply chain disruptions from COVID-19 and increased spending on durable goods, while low interest rates have spiked real estate prices. The central bank is now quickly raising rates to manage inflation, which poses challenges like potential recession risks.
Despite efforts, the Bank of Canada anticipates that inflation will remain high and does not expect to achieve the 2% target until late in 2024. This ongoing issue requires careful management to prevent inflation expectations from becoming unanchored, which could disrupt the economy further.
It’s important to understand how these two things affect our everyday lives – from buying groceries to real estate and the implications for businesses we purchase in our portfolios.
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