Inflation in Canada is taking a toll on individuals, families, and businesses of all sizes. The higher interest rates, the increased cost of moving goods into the market, and the resulting increase in the price of the basics of life – food, housing and heating – are driving families and small businesses into debt.
Inflation and the family
Even before interest rates started to increase, the consumer was seeing substantial increases in their weekly grocery bill. The rise in fuel costs for transportation had an almost immediate effect on the cost of groceries. On top of that, the cost to fill up your gas tank had put financial pressure on families. People who were just managing before those increases, were now scrambling to get from paycheque to paycheque.
Then interest rates started to go up. And they continue to increase. This is an attempt on the part of the government to curb inflation – but it is coming at a huge cost to the consumer. Interest rate hikes mean everything costs more. Anyone who had a variable rate loan or mortgage, or credit card debt, has seen a substantial increase in their payments.
For example, a family with a typical 2.9% mortgage of $200,000, would have been paying around $483.00 in interest per month. If renewing that mortgage at a current rate of 5.424%, they would see the monthly interest cost increase to $904.00. (Interest only, not including principle or property tax). That’s a huge monthly hit on the family budget – and rates may go up even further. On top of that, as winter comes on, people will see significant increases in the cost to heat their homes.
For people carrying any kind of floating or unsecured debt, particularly credit card debt, the increases in interest rates will be showing up on their monthly bills. Some credit cards now have interest rates as high as 28%! Not only does that make it tough to make the payments, it makes it very difficult to reduce the overall debt load.
In the past, people could re-mortgage their homes and use equity in the home to pay down higher interest unsecured debt. With the higher mortgage rates, that may not be viable for many. A second mortgage, or a consolidation loan would have the same issues. A consolidation loan only works if the payments are affordable.
Small businesses and inflation
We all know that small businesses took a huge hit with Covid. Most are still struggling to get their customer base back, and to find employees. The cost of products and materials has increased with supply issues, inflation and skyrocketing transportation costs. On top of that, employees now need to be paid more because inflation has increased their personal needs. If the planned increase in minimum wages goes ahead, it will affect wages at all levels, again increasing labour costs.
“Using a restaurant as an example – your costs are up, you have to charge more, but the families that used to eat out are having their own struggle with inflation and cannot afford to go out as often. Your costs are going up, but your business is decreasing. This will be true of most businesses as inflation affects all sectors of the economy” Jillian Taylor-Mancusi, CEO, LCTaylor
For businesses involved in the trades, they are watching their costs escalate, making it hard to quote on jobs without taking a loss. Customers are going to drop off in direct proportion to your prices going up.
Inflation and farming operations
As with other sectors of the economy, everything a farmer uses to produce the food we rely on has increased in cost – equipment, parts and repairs, the gas to run the equipment, labour, feed for livestock, even the fertilizer and seed.
Farmers have traditionally “eaten” cost increases, because it takes some time before they see an increase in the price of their product. And usually that increase, if it comes, doesn’t nearly match the increase they have seen in their costs.
With inflation being so widespread, local demand for products may also decrease as families have to decide whether they can afford to buy milk or butter, or can use cheaper alternatives. More and more people will be forced to buy from the cheapest source – usually mass produced food from multi-national corporations. The local producer provides a better, more nutritious product. But when times are tough, and families have to make hard choices, local producers may not be able to compete, price-wise, with the mass produced products brought in from China and elsewhere.
Along with rising inflation – consumer debt is also on the rise. This podcast takes a look at Canadians growing debt load and what the future may bring.
What Can You Do?
Whether an individual, small business, or farm operation, the first and most important thing to do in this economic climate, is to reduce debt, particularly high interest debt. To do this it will take some careful budgeting – equally important in today’s economy. You need to know how much money is coming in, and to set priorities for where it is spent. This is a vital, but often difficult process.
Seek professional advice. It is never too early to seek advice on how to re-organize priorities to make ends meet. As Licensed Insolvency Trustees, we often meet with people who just need a new perspective, or help with effective budgeting to turn things around. Canada hasn’t seen this vicious cycle of inflation for 40 years, so for most people, it is an unfamiliar challenge.
One thing that we have learned from working exclusively in the debt field, is that the longer you wait to get advice, the fewer options you will have to solve the problem. So, seek advice early in the process.
At LCTaylor, there is never a charge for consultation. We will sit down with you and first, find out what you want to accomplish, and then discuss various ways you might be able to do that – whether through careful budgeting, re-organization, consolidation of debt or more extreme measures.
As Licensed Insolvency Trustees, we work under the Bankruptcy and Insolvency Act of Canada, which gives us a couple of unique tools in our toolkit that other financial and debt advisors do not have. A formal Consumer Proposal or Division One Proposal (sometimes considered a corporate proposal), can give you instant relief from further accumulating interest and penalties, freezing your debt at its current level. Even better, it allows you to make payments that are within your ability to pay, and to have any remaining portion of the debt discharged (eliminated).
Another option is Bankruptcy. There are some situations where this is the best option. It all depends on what the individual, or business wants to accomplish. Bankruptcy will eliminate all unsecured debt, letting you get a fresh start. It has a few more requirements, and may affect some assets, but it is almost always the quickest and cheapest way out of debt.
Both a Consumer Proposal and a Bankruptcy provide immediate protection from creditors, preventing collections, even garnishments of wages and bank accounts. Both options can also include CRA debt. We have not dealt with tax debt in this article, but it is a growing problem for individuals who collected CERB payments and now have tax owing, and for businesses and farms who are struggling to keep the doors open, let alone pay quarterly installments and remittances. If you have tax debt, it is particularly important that you see us as soon as possible. CRA has access to some special abilities in collections that other creditors do not have.
Inflation. Here to stay? For how long? We don’t know. But we do know that it is causing tremendous problems across our economy. Carrying debt during an inflationary period is crippling. And we know how to get rid of debt. Give us a call at LCTaylor – 204-925-6400, or check out our website at lctaylor.com.
Leigh C. Taylor, LIT
