Inflation is often a quiet thief of living standards. Even a modest 2–3% annual inflation rate means Canadians can buy less with each dollar than before. As one financial guide puts it, inflation “weakens purchasing power — leaving you in a position to buy less with the money you have”. In recent years Canadians have felt this squeeze: everyday essentials like groceries and rent have risen much faster than the general Consumer Price Index. For example, by mid-2025 the average Canadian was paying 27.1% more for groceries than in 2020, even though headline inflation was near the Bank of Canada’s 2% target. In this environment, safeguarding your purchasing power – the real value of your income and savings – is more important than ever.
The Bank of Canada’s official mandate reflects this: it aims to keep inflation around 2%, a policy known as inflation targeting. By holding inflation low and stable, the BoC is in effect preserving the value of Canadians’ money. Historically, this focus on price stability has worked: over the 25 years before the pandemic, Canada’s inflation “averaged very close to 2%… and economic activity was much more stable”. As Governor Tiff Macklem noted, Canada was only the second country to set a formal inflation target (in 1991), and the framework has kept inflation close to target through many economic shocks. Low inflation protects purchasing power, especially for households with tight budgets. During a 1997 parliamentary debate one member observed that “low inflation protects purchasing power for low income Canadians in particular”. In other words, stable prices benefit everyone – but most of all those who have the least room to absorb higher costs.
Recently, however, there have been concerns about the future of inflation policy. The Bank of Canada quietly updated its web content in 2025, removing some historic language about “preserving the value of money.” Critics seized on this change as a sign the Bank might be shifting priorities. Officially, however, the BoC insists the 2% inflation target remains central. Governor Macklem stated that the 2% goal “has proven its worth in achieving price stability over time” and will not be reconsidered in the upcoming framework review. In other words, the Bank says it is as committed as ever to controlling inflation. Even so, some question what the new wording signals about policy emphasis. One thing is clear: keeping inflation under control is directly tied to Canadians’ purchasing power.
What Is Purchasing Power – and How Does Inflation Erode It?
Purchasing power refers to the real value of money: how much goods and services your income or savings can buy. Inflation – the rise in general price levels – erodes purchasing power by reducing the amount a dollar can purchase over time. Put simply, if prices go up by 3% in a year, a loaf of bread or a tank of gas costs 3% more than it did last year. Your $100 buys 3% less than it would have. As financial advisors explain, even a small inflation rate compounds into a significant loss over years: “If you have $10,000 saved and inflation is running at 3%, that $10,000 will only have the purchasing power of about $9,700 in a year”, effectively “losing $300 worth of what your money can do” with no spending. In other words, inflation is the gradual shrinkage of your money’s buying power.
Inflation itself is simply the rate at which prices rise. When prices of everyday items – food, rent, utilities, transportation – climb, the average Canadian feels the pinch. Questrade, an investment platform, puts it plainly: “Inflation is the rate at which the average price of goods and services in an economy increases… Inflations means your money doesn’t stretch as far as it used to”. In essence, inflation and purchasing power are two sides of the same coin: higher inflation means faster loss of purchasing power. That loss can be subtle but relentless. A modern-day analogy often used is that leaving money in a plain savings account is like anchoring a boat in a rising tide – eventually you’re left behind. In the words of one guide: “Your savings account is a boat anchored in a rising tide... staying put is not the safe path. In a world with inflation, it’s not even the neutral path. What it really leads to is slowly, steadily falling behind”. The implication is clear: without proactive steps, inflation will slowly diminish your savings and incomes.
Canada’s 2% Inflation Target: A Brief History
To understand why purchasing power is important, it helps to look at Canada’s long-standing inflation-targeting framework. For more than three decades, the Bank of Canada and the federal government have jointly maintained an inflation-control mandate. Beginning in 1991, Canada set explicit multi-year targets for the Consumer Price Index, with a goal of stabilizing inflation near 2%. This framework was initially met with skepticism, but it has largely succeeded. As Governor Macklem recalls, once implemented, “We did get inflation down to the target and keep it there… inflation averaged very close to 2% over the 25 years prior to the pandemic”. In practical terms, that means that for a quarter-century Canada saw modest, predictable price growth rather than large swings.
Why has this mattered? Because low and stable inflation helps keep the economy predictable. Consumers and businesses can make long-term plans – investing, saving, hiring – without fear that price shocks will wipe out their gains. In the political arena, leaders have often linked low inflation to prosperity. For instance, in 1997 a Member of Parliament praised a budget’s effect on consumer confidence precisely “because it is engendering consumer confidence… and it is important to point out that low inflation protects purchasing power”. By contrast, episodes of high inflation in Canada’s past (for example, in the 1970s and 1980s) were widely seen as damaging: people’s real incomes fell, and the economy became more volatile. That history underpins why the inflation target is often equated with protecting Canadians’ dollars. Put another way, the Bank’s goal of 2% inflation is essentially a promise to preserve the value of money over time, so that paycheques, pensions, and savings don’t lose their real value quickly.
Every five years the Bank and Finance Minister formally review this target. In late 2025, Governor Macklem assured Canadians that no change was planned: “Now is not the time to question the [2%] target”. The 2% target is “the midpoint of [our] 1%-3% range” and remains the anchor of policy. In short, the official framework remains committed to price stability — which by definition means guarding purchasing power.
Why Purchasing Power Matters to Your Wallet
Even with inflation now nearer to target than it was in 2022, many Canadians are still grappling with higher costs. Groceries, rent, and household bills have not entirely returned to their pre-2021 levels. Statistics Canada reports that by July 2025 overall CPI inflation was about 1.7% year-over-year – seemingly benign. But behind this headline are outsized hikes in essentials. Food prices, for example, were 3.4% higher in July 2025 than a year earlier, driven by higher fresh-produce, coffee and confectionary costs. Over the past five years (2019–2024) grocery bills have jumped by more than 27%. Housing and utilities have also risen, although shelter inflation has moderated in recent months (shelter was up 3.0% in July 2025).
These price changes matter because they erode real incomes. Even if your wage matches inflation, your extra pay is offset by higher living costs. If wages lag inflation, real take-home pay falls. Indeed, Canadians across income levels have seen mixed experiences: between 2019 and 2022 (before the peak inflation years), rising wages and government transfers actually gave many households a net gain in purchasing power. The Parliamentary Budget Officer (PBO) reports that since the pre-pandemic era, government measures and wage growth helped disposable incomes grow about 21%, while prices grew about 15%. In that period most Canadians could buy more with their incomes than in 2019.
However, the surge in inflation since 2022 has started to reverse those gains, especially for lower-income families. The PBO notes that since 2022, rapid inflation and higher interest rates have already “reduced purchasing power for lower-income households”. In other words, while wealthier Canadians saw their incomes lifted by rising investment income and savings, vulnerable households are now feeling the pinch as everyday essentials take up a larger share of budgets. This disparity is important: a low- or middle-income family can’t easily absorb a sudden jump in grocery or heating costs, whereas higher-income households have more cushioning. As one expert summary put it: “Persistent inflation would keep interest rates high and, together with slow growth, would put continued upward pressure on government deficits” – which then further squeezes everyone’s spending power through taxes or cuts.
All of this means that protecting purchasing power is not just an abstract goal, but a real matter for Canadians’ standard of living. If inflation runs hotter for longer, incomes will buy less and debts become harder to service. Conversely, keeping inflation low gives wages their full value and keeps interest rates (and mortgage costs) in check.
Fiscal Policy and Inflation: Watch Deficits and Spending
Monetary policy (via interest rates) is one side of the inflation equation; fiscal policy (government spending and deficits) is the other. In the current Canadian context, fiscal policy has become a hot topic. In the run-up to the October 2025 budget, Prime Minister Mark Carney’s Liberal government has announced an ambitious platform of new spending and tax cuts. The Liberal plan includes about $130 billion in new measures over four years, alongside an equally large package of tax relief. Economists project this would raise the federal deficit substantially – for example, a deficit of $62.3 billion in 2025–26 versus a baseline of $46.8 billion. In practical terms, this means more government borrowing to finance investment programs, higher military spending, infrastructure projects, and broad tax cuts.
Why does this matter for purchasing power? Large deficits and spending can stimulate the economy — which may be desirable if there is slack — but they can also add to inflationary pressures if the economy is already near capacity. Many analysts argue that Canada’s recent inflation surge was driven not only by pandemic-related supply shocks, but also by fiscal stimulus. A comprehensive study by the Fraser Institute notes that “higher government spending and deficits helped fuel the recent surge of inflation”. In other words, when the government pumps billions into the economy without offsetting revenue, demand can rise faster than supply, pushing prices up. This is exactly what happened globally in 2021–22 when stimulus cheques and spending outpaced goods availability.
For Canadians, the takeaway is that fiscal policy and inflation are linked. If the federal government keeps expanding spending ($130B of new spending is a lot) without raising taxes to match, there is a risk of higher inflation down the road. Higher inflation would, in turn, erode the purchasing power of every dollar of income and saving. Governor Macklem and others have hinted that for inflation to decisively fall back to 2%, monetary policy (raising rates) was necessary – but also that fiscal restraint could help. As one analysis concludes, returning inflation to target will require fiscal policy to reinforce monetary restraint. In plain terms, both the Bank and the government need to pull the same way. If government spending remains “loosely” committed to price stability, then Canadians may find their wages and savings undercut by any future inflation upswing.
Protecting Your Purchasing Power: Practical Tips
Given the stakes, Canadians can take steps to shield their finances from inflation. No one can control overall price trends, but you can manage your personal situation:
Build an emergency fund and use high-yield savings. Start by setting aside some cash each month into an easily accessible account. Aim for a buffer of 3–6 months’ living expenses. Even small amounts add up over time. Many banks offer high-interest savings accounts or guaranteed investment certificates (GICs) that pay more than a chequing account. Having liquid savings earns you interest (above inflation, if possible) and keeps you from relying on expensive debt (credit cards) when unexpected costs hit. As one advisory note emphasizes: even a modest regular saving habit “can make a big difference in the long term”.
Diversify your investments. Letting cash sit idle will ultimately lose value if its return doesn’t beat inflation. A diversified portfolio – a mix of stocks, bonds, and other assets – can help your money outpace inflation over time. Stock markets have historically returned several percentage points above inflation on average. Bonds (especially inflation-indexed bonds) can also protect some value. As the CIBC advises, “a well-diversified portfolio is one of the best ways to manage the impact of rising inflation”. Review your investments to ensure they match your goals and include growth assets. Consider holding some Canadian Real Return Bonds or TIPS-like instruments if available, as they explicitly rise with inflation.
Cut unnecessary costs and budget wisely. Track your spending and see where inflation has bitten hardest in your budget. If food and energy costs are up, look for savings there (coupons, store sales, energy-efficiency fixes). Cancel subscriptions or memberships you don’t use. Even small savings add up. Reallocating $10–20 per month from non-essential items into savings or investments means more buying power over time. In the words of a financial guide: “Review your spending… and cut out a few unnecessary expenses. That will immediately boost your cash flow.”.
Manage debt carefully. Inflation often leads central banks to raise interest rates. If you have variable-rate debt (like a variable mortgage or line of credit), higher rates mean higher payments, which shrinks your disposable income further. If possible, lock in low fixed rates on mortgages or refinancing to trim interest costs. Speak to your lender about consolidating high-interest debt. Remember that the real value of fixed-rate debt falls over time under inflation – paying off fixed debt faster than inflation lowers your real debt burden.
Consider inflation-protected instruments. Canada issues Real Return Bonds (RRBs) that explicitly adjust their principal with CPI inflation. Holding some of these can directly preserve purchasing power. Likewise, investing in asset classes that historically track inflation – such as real estate, commodities, or inflation-linked equities – can serve as a hedge. For example, property values and rents often rise with inflation, so owning real estate (even via REITs) can help your wealth keep pace with prices.
Advocate for sound policy. Beyond personal finance, staying informed about government actions is key. Watch for updates from the Bank of Canada and the federal budget. Understand how fiscal and monetary policies might affect inflation. In a democracy, citizens can express preferences for stability: at election time, consider which party’s platform seems likely to prioritize price stability and financial prudence. Transparency in government spending and central bank decisions ultimately protects the economy at large – and your wallet with it.
In sum, protecting purchasing power is about both macroeconomic policy and personal finance. When prices are stable, families can save for the future and businesses can plan, spurring growth and confidence. History shows that letting inflation run high can erode the wealth of savers and sting consumers. Canada’s inflation-targeting regime was built precisely to shield the economy from these harms. Even as inflation has recently come down, Canadians benefit from vigilance: they should hold policymakers accountable for price stability and take their own steps to keep their finances resilient. As one commentator warned, a savings account alone is “not even the neutral path” in inflation — doing nothing is a guarantee of losing ground. By staying informed and proactive, each Canadian can help preserve the buying power of their dollar.