7 Tips to Hedge Against Inflation in Canada

Although the inflation rate in Canada saw a slight decrease in 2023, when we go to the grocery store or the gas station, it doesn’t feel like we’re out of the woods. The efforts of the Bank of Canada seem to have stabilized the annual inflation rate at around 3.5% (while we were used to 2% for decades), but it does not anticipate a return to normal before 2025. In this context, here are some tips to combat inflation.

Naturally, higher prices for things we pay for to maintain our lifestyle will make you try and save some more money, or even hide money under your mattress.

However, hiding money under your mattress means your money is worth 3.5% less every year. Even if you have your cash stashed in a high interest savings account with a 3% to 4% rate, you are barely maintaining your purchasing power. However, there are a few ways you can try and keep afloat when inflation feels like it’s drowning you and your finances.

1. Make Extra Money

One of the most obvious ways to try and beat inflation is to make extra money.  Likely your boss isn’t giving you a 6% salary increase this year.

With the internet, side hustles are easier than ever.  There’s dog walking with Rover, driving and delivering meals through Uber Eats or DoorDash, there’s renting out a room or suite with Airbnb or hosting a homestay student, there’s creating items or crafts and selling them on Etsy, and even selling items that you no longer need on Facebook Marketplace or Craigslist.

Sure it doesn’t seem like much but it can add up collectively over time.

2. Invest in Equities

One of the best ways to hedge against inflation in Canada is to buy income producing assets and invest in companies where profits grow faster than inflation. 

It might not come naturally to you though because people may feel scared to invest in the stock market while the market is down and while there is so much uncertainty.

According to Genevieve Roch-Decter of Grit Capital, since 1900 the US dollar has lost 98% of its purchasing power, meanwhile the S&P500 has returned an astounding inflation adjusted 315,853%.

Investing in equities is not risky per se (if you invest in an index fund like the S&P500).  Not owning equities during high inflationary times like these is actually considered riskier.

The S&P500 comprises of 500 of America’s largest companies. These companies can pass on the higher inflation costs to their customers and therefore you as an investor can benefit from the company’s continued growth and profitability.

If you’re investing in individual companies, think about companies that are able to pass on the cost of inflation to their customers easily. Companies that require little capital to operate do well in a high inflationary environment.

3. Invest in Real Estate

If you own real estate in a desirable location where the economy is robust, you can pass on rent increases to your tenants.  As inflation increases, property values usually follow.

Of course this all depends on whether you live in a location where there are rent increases capped.  For example, in Vancouver BC there was a rent freeze because of COVID and the rent freeze recently lifted, but the maximum allowable rent increase is 1.5% for 2022.

Personally I prefer to invest in real estate via REITs (Real Estate Investment Trusts) because it is less troublesome than dealing with tenants.  Real Estate Investment Trusts are companies that own and operate real estate that produces income. 

Another option for smaller investment amounts (unless you are an accredited investor) is real estate crowdfunding in Canada.  Real estate crowdfunding allows people who might not have the large capital to invest in real estate, to be able to invest.

4. Use Debt Wisely

Right now borrowing money is still relatively cheap as interest rates don’t increase dramatically overnight.  Borrowing money is often frowned upon, but not all debt is bad and in fact, wealthy individuals tend to use debt to build wealth.

Beating inflation could mean using the power of leverage in today’s low interest rate environment to purchase assets at discounted prices.

This can be tax advantageous too as interest paid can be tax-deductible if the money borrowed is used to generate income and invest.

Before you start to use debt wisely to invest though, you should calculate how much leverage you can safely take on.

I often think of a Warren Buffett quote when I think about investors using leverage.

“You only find out who is swimming naked when the tide goes out.”

5. Live Simply

The individuals and families that will feel the least amount of pinch having to deal with inflation are those that can live simply.  If you have a low cost of living to begin with and are able to have a high savings rate before the period of higher inflation, there’s less issue with having the cost of goods increase because there’s some wiggle room.

Similar to businesses to invest in mentioned earlier, that do well with inflation because they need little capital, if your household expenses require little capital, your personal finances will also fare better during high inflationary times than if your household expenses required a lot of money to maintain.

6. Meal Plan with Sales in Mind

Meal planning your week with sales in mind can also save you a lot of money (and also help you be creative with meal planning).

Higher prices on certain foods have changed our behaviour and meal plans for the week.The price of bacon has gone through the roof with it increasing 20% in recent months.  That occasional $2.99 or $3.99 package of bacon is non-existent, and bacon seems to cost $5.99 now if it’s on sale.

Naturally, our own family’s meal planning has changed to reflect this,  and we are eating less bacon and eating less red meat due to the higher costs, but the byproduct of this is also better health.

You can still hedge against inflation by buying groceries on sale, and meal planning for the week based on the weekly flyers.

7. Maximize Loyalty and Rewards Programs

Reducing your household expenditures can also be helped by taking part in loyalty and rewards programs available to you.

One of my favourite loyalty and rewards programs in Canada is the PC Optimum points program.  Because we use the PC Financial World Elite Mastercard when shopping at Loblaw’s stores, we are able to save money on groceries even faster and maximize our PC Points.

We regularly have a few hundred dollars of PC Optimum points in our account.  Having $50 off per month on groceries doesn’t seem like a lot, but that’s over $600 a year in savings.

Hopefully these tips help you hedge against inflation in Canada.  We will get through these expensive times.

“Change is never painful, only resistance to change is painful.” — Unknown