141 – Cost of Living: Why Does It Matter?

Wayne Kay 00:04
Cost of living. Why does it matter? I think we’re all feeling why it matters. We’re going to dive deep into that today with our Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay, and in today’s show, we’re going to talk about what is the cost of living? How do they come up with it? Does the cost of living always go up or does it go down? How does inflation affect the average person, and what can you do to protect yourself?

To help me with this and more, my guest today is Leigh Taylor with LCTaylor Licensed Insolvency Trustee in Winnipeg, Manitoba. Leigh, welcome to the show.

Leigh Taylor 00:49
Thanks very much, Wayne. It’s a pleasure to be here.

Wayne Kay 00:51
We always have great discussions, and how can we not when there’s so much going on economically in the world and our country as well. A lot of people, I guess, are having a tough time with the cost of living these days. Do you ever not have the discussion?

Leigh Taylor 01:09
Well, we have it a lot. Most people don’t really understand what the cost of living is all about. It just seems to be a negative thing to them. But generally speaking, cost of living is a term that generally refers to the consumer price index.

The consumer price index is a measure that the government has created. It takes a standard set of consumer goods and prices them periodically to see whether they go up or down, and that’s how the index is created. You hear a lot about it on the news and everything because inflation and the cost of living is measured that way. So it’s an actual.

Wayne Kay 01:50
Do they base it on the price of different items, like the price of bananas, the price of gas, the price of milk? What do they use?

Leigh Taylor 02:03
Well, they use a pretty standard shopping list of things that normal people would buy, most of the things like food items. But it includes things like gasoline and other variable things that go into the average person’s cost of living.

Wayne Kay 02:20
And is that different from inflation? Can you explain the difference?

Leigh Taylor 02:25
Well, when the cost of living goes up, this standard set of consumer goods starts costing more. That’s called inflation, and we’ve inflated the price of it. Now, the government aims as much as they can to control these things.

They aim for about 2% inflation as being a healthy rate of inflation. So that’s what they try for. They don’t always succeed in getting it because there’s all sorts of factors that deal with it, and they’ve got various tools to try to keep the inflation rate under control.

They control things like the money supply. People have heard of quantitative easement on the news, but that’s really the government printing up more money, and the government prints up more money so they can spend more money, and they control interest rates to a large degree as well.

And all these things have a bearing on controlling inflation. They want some inflation, but not too much inflation.

Wayne Kay 03:21
So the cost of living, does it always go up?

Leigh Taylor 03:26
Well, in theory, no, but in reality, it rarely goes down. Now, the problem with it is that when it goes down, it’s called deflation, and that’s considered a much more serious problem than inflation, and it’s much more difficult for the government to correct it.

That’s because in a period of deflation, people expect products to cost less next week. So if something costs you $100 this week and you think it’s going to be deflated, it may only cost you $95 next week or next month. Or your car is going to go down in price if you wait until next year.

So what tends to happen is that people stop buying things. And when people stop buying things, putting things off, then the economy stalls and this can lead to a recession or even a depression.

Wayne Kay 04:22
All right, is that something that would ever happen? Do you think we would ever see a depression happen?

Leigh Taylor 04:29
Well, we haven’t seen it in 100 years, but the great depressions of the early 1900s were caused by many factors.

Wayne Kay 04:39
Right.

Leigh Taylor 04:39
One of them is disturbing the basic economy. People stopped buying things because they were afraid that they weren’t going to get any more money or whatever, and that just meant that everybody sort of stopped buying things. And if you don’t buy things, then businesses start going out of business real quick and you end up with a downward spiral.

That’s really difficult for governments to stop. They print more money, but that creates all sorts of problems in itself. People will hoard things because they’re afraid that the supply will run out and these sorts of things. So the economy is a very fragile thing. It’s got a lot of factors that influence it.

Inflation is one thing, but they can control it, but only to a certain degree. Deflation may be even worse, and they have a lot of trouble controlling it at all. If you go back, those of us that are old enough to remember the 1980s when we had interest rates going up to, that’s mortgage rates going up to 17 and 18% a year. And if you remember that or talk to your parents about it, you’ll find out that that was a very difficult time for everybody.

People were losing their houses because they couldn’t afford to renew the mortgages on them. Even the banks were having a tough time because they ended up taking over things like farmland, because the farmers were having a real tough time. And banks don’t like taking over assets. They like to get the money. So it can be a real tough time all around.

Governments try really hard to control it. But as you can see, from the last couple of years, we’ve had inflation rates of 7, 8, 9%. And that’s really tough on a lot of people. You get senior citizens with fixed income. Well, if you get $2,200 a month on your pension, and all of a sudden inflation goes up, and what you could buy for $2,200 now costs you $2,400.

Well, $200 a month going in the hole doesn’t last very long before you start having real financial problems and correct it as you may, life is not going to be very pleasant. So that sort of hurts as well.

Inflation, even for the average person, wages seldom keep up with inflation. If inflation goes up by 9% and you get a 2% raise this year, well, you’ve lost 7% of your buying power, and 7% on the average income of about $55,000. You’re looking at losing somewhere between $3,000 of spending every year. You do that for two or three years, you’ve got a serious problem on your hands.

Wayne Kay 07:34
I’m wondering, since we had that 7, 8% bump, can we just limit it to, like, 1%? I’m still surprised by how much things have actually gone up, even in the last year. But certain items I’m seeing are starting to come down.

Leigh Taylor 07:53
Well, we do have a capitalist system, and it has its flaws. It might be the best system around in my mind, but it still has its flaws. So you leave things like prices alone.

And the idea, if you’re opening up a store, the object of the store is to make a profit. If you can make a bigger profit because you have a unique item, you’re going to up the prices a little bit. Supply and demand. If there’s lots of demand, you can supply it at a better price.

But if other things start going up, the cost of buying your merchandise or your inventory, the cost of shipping your inventory from someplace in the states up to Canada, because the cost of fuel goes up, the cost of trucking goes up, the cost of wages go know the truck drivers go on strike or whatever and want more money. You know where they’re going to get the money from the people that are paying for the freight. So if that all goes up, then the cost of goods are going to go up.

If they have a frost in Florida and kills off half the orange crop, you can bet the other half is going to have to go up in price to pay for the costs. So there’s an awful lot of things that go into it. It’s a very complex economic system that we’ve got because of all the moving parts.

Wayne Kay 09:12
Right.

Leigh Taylor 09:13
And you have to sort of work your way through it. Sometimes you’ll be on top of it and sometimes you won’t. And I was going to say that goes for everything from dairy farmers to beef farmers.

The price of beef goes up and down, and the poor farmer doesn’t have a lot of control over the price. He has to try to get the best product he can on the market for the best price so that he can hopefully make a profit.

Wayne Kay 09:38
I have a cousin who’s a farmer and he’s telling me that, oh, yes, I’ve already lost $100,000 in grain just from the prices that have happened recently. Once again, you’re right. He doesn’t get to choose what those prices are.

Leigh Taylor 09:57
He’s dealing with a world market. So if they have a bumper crop in Europe and they’re selling the wheat because they got a whole bunch of it, that’s going to affect it because the people that would normally buy our wheat are now buying it from Russia.

Wayne Kay 10:12
How do you protect yourself through this? Is there anything we can do?

Leigh Taylor 10:17
Well, yes, I think there really are a few things that you can do to protect yourself. One thing you can do when you end up in an inflationary time. You can have a very careful budget, say, okay, if things are going to cost more, what can I cut out? Maybe I don’t need my cappuccino from Starbucks every morning. I’ll cut out a few dollars and save something else.

You can see about increasing your income. Is there a part time job, a second job that you can get to bring in a little extra money in your spare time? Those sorts of things help. Careful budgeting usually really controls it to a large degree.

And if these things change quickly, and sometimes they do, you just have to try and bear with it. That’s not a really good answer. But there is no really good answer to the uncertainties.

You budget, you put away a certain amount of money, have a little rainy day or emergency fund, so that if there are problems, you can deal with those problems because you have a little bit of money set aside.

Rather than going on a really fancy vacation this year, you put $5,000 away in a savings account, a special savings account that you only use for emergencies, and that’ll give you enough time to adjust to the changing economic conditions before they affect you too adversely.

Wayne Kay 11:46
And the psychology around that is major. You guys do a lot of work with clients, and there’s budgeting that’s involved when you’re working with them. There’s a psychology when you actually have that two, three, four, $5,000 in an emergency fund. It just gives you a little breathing room, doesn’t it?

Leigh Taylor 12:07
Well, it does, yes. And it would be nice if that was the only solution. It solves most of the problems, but you’re still going to have people that are in situations where it’s the situation that is the real major factor.

The company you’ve worked for for 15 years suddenly goes bankrupt. You’re out of business because they couldn’t adjust and you’re out of work. Unemployment insurance helps a little bit, but it doesn’t cover all of your costs. If you don’t have something set aside for it, you’re in trouble. And then, of course, increase your family size.

Your wife tells you she’s pregnant, and that’s good news, I guess, except the timing is really bad because she’s now on maternity leave, and you had double whammy on that. And your mortgage comes due, and your mortgage went from what was 2.1% up to 5.8%, and that suddenly cost you another $800 a month on interest payments on your house. That all comes at once. That’s a problem. And to a large degree, it’s out of your control, too, which is really unfortunate, but it happens.

Wayne Kay 13:12
I’m glad you’re explaining that, because I think when we hear Bankruptcy or needing to go get a Consumer Proposal, sometimes people have a preconceived idea that, oh, that’s bad spending. But it’s not. Life can cost you a lot more, just like you just explained.

Leigh Taylor 13:33
It’s very true. Basically, when people get into those financial difficulties, it’s a number of causes that have all come together. Some of it, no doubt, is they didn’t put an emergency fund aside when they could have used it. But not everybody does.

All the other factors, again, beyond their control, to some degree, pop up and they just find themselves in a hole that they didn’t dig for themselves. It was dug for them. They happen to fall into it and they need help to get out of it.

So you have to take some solace in the fact that they’re not alone, certainly not now, because the number of extenuating factors that have arisen with COVID and taxes and government spending and everything in the last couple of years> Boy, you have to be on pretty firm ground just to survive those kinds of changes.

Wayne Kay 14:24
Yes, well, a lot of Canadians are in it together, and if they need help, well, they can always reach out to you or your team as well, right?

Leigh Taylor 14:32
Yes, that’s for sure. We really like to talk to people earlier on. So if you suspect that you’re having a problem or you’re not quite sure what the answer is, come and talk to us.

Just talking to us doesn’t mean you’re going bankrupt or taking a statutory remedy, but it means it’s the first step towards getting back on your feet again. And that’s important.

Wayne Kay 14:51
Absolutely. Leigh, always a pleasure. Thank you very much for being on the show today.

Leigh Taylor 14:55
Oh, thanks for having me.

Wayne Kay 14:56
My guest today, Leigh Taylor. And you can learn more or schedule that free consultation with LCTaylor Licensed Insolvency Trustee through the website lctaylor.com.

And that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out our website, debtmatters.ca. Thanks for listening.