How to use tax refunds wisely in the face of rising inflation and interest rates

The cost of goods and services that go up quickly can hurt businesses and family budgets in Canada in a big way. Recent inflationary economic headwinds have hit many countries around the world, including Canada. These include rising oil prices; a strain on the global supply chain after the pandemic; and the conflict in Ukraine.

When inflation lasts for a long time, it usually hurts our wallets the most, such as at gas stations and grocery stores, but it also hurts many other parts of the economy. In 2022, Canada recorded the highest inflation rate of 8.1% in June since 1983. 

So, should you be concerned about inflation while making financial decisions? A little perspective may go a long way when it comes to the economy and the financial markets. We look at what might happen to you and your money if interest rates and inflation go up. 

What is inflation?

In simple economics, inflation is an increase in the price of any product or service over a given period of time. We can also say that inflation is a measurement of how prices alter over time and how they impact the purchasing power of money. A few of the many indicators that aid economists and investors in assessing the state of the economy include the unemployment and job growth rates; GDP; trade deficit; and surplus. The list is very long, and each tells a different tale at a certain time, which adds to the complexity and causes a burden on the economy. 

Moreover, to illustrate inflation, the Consumer Price Index (CPI)helps in calculating the cost of particular products and services, including food, fuel, furniture, apparel, and amusement, or we can say necessity products. The Bank of Canada aims to maintain annual inflation at 1% to 3%. They do this by using the policy tools they have, such as being able to change interest rates.

Interest rates and inflation: how do they relate?

The Bank of Canada started hiking its policy interest rates to combat inflationary pressures in early 2022, when the economy was booming and the labour market had largely recovered from the pandemic impacts. The Bank of Canada reviews rates almost eight times a year. The main object of that was to raise the cost of borrowing money, making loans for both the firm and consumers more costly and difficult to pay back. However, when interest rates rise, people are concurrently encouraged to save money for lending so they receive a greater amount of return from the interest rate. 

How to make the best use of tax refunds as inflation and interest rates rise

Inflation reached a three-decade high of 6.7–8.1% in March and June. The Bank of Canada increased the policy interest rate to 1% in April, with more rises anticipated as the economic picture changes. Does the question arise as to how this influences the advice that tax refund advisors provide?

According to the Official Canada Government website, senior financial adviser Laura Southall of Assante Financial Management Ltd. in Kingston says that improved rates for guaranteed investment certificates (GICs) in Ontario have caused her to rethink some of her recommendations to customers. She tends to advise clients who would have previously placed a tax refund or other assets in GLCs to keep their money available even if GICs paid 1% and high-interest savings accounts paid 0.5%. If you look at one-year GICs now, they offer 3% returns and high interest. 

Since savings accounts only yield 0.75%, GICs frequently choose savings accounts. Ms. Southall said that inflation was unavoidable because the economy had been unstable for the past two years. During that time, money was freely given away and businesses shut down. 

However, she continued, the administration now promises to reduce inflation to 2% by 2040. She always advises creating a buffer against all of life’s unforeseen events rather than advising people to use tax returns to do so.  

Summary

Recent inflationary economic headwinds have hit many countries around the world, including Canada. These include rising oil prices; a strain on the global supply chain after the pandemic; and the conflict in Ukraine. When inflation lasts for a long time, it usually hurts our wallets the most, such as at gas stations and grocery stores, but it also hurts many other parts of the economy. However, when interest rates rise, people are concurrently encouraged to save money for lending so they receive a greater amount of return from the interest rate. How to make the best use of tax refunds as inflation and interest rates rise. Inflation reached a three-decade high of 6.7% in March and June.