A renowned economist who called the U.S. housing crisis and global financial meltdown months before they began says inflation is on the way, and a whole generation is ill prepared. “Today, we have a group of twenty, thirty and even forty-somethings who know little about bond selloffs, inflation or even what a normal Fed tightening cycle looks like” says Gluskin Sheff chief economist David Rosenberg in a note to clients.
If he’s right, even standing still will set you back. Inflation means higher prices for every day expenses like gasoline, food and clothes. It also means higher borrowing costs as central banks try to cool inflation through higher interest rates.
How bad could it get? Back in 1981 inflation hit 13 per cent compared with less than 2 per cent today, the Bank of Canada benchmark lending rate topped 21 per cent versus 1 per cent today, and five-year mortgages were over 19 per cent compared with less than 4 per cent today.
This could all come as a shock for the first generation that has accepted perpetual debt as a normal part of life. The average Canadian household currently owes more than $1.60 for every dollar of disposable income it takes in each year. In the 1990s, households held less than one dollar in debt for every dollar they brought in.
If income levels remain the same, debt will take a greater proportion of it - leaving less to pay down the principal, make purchases, or save for retirement.
The good news, according to Mr. Rosenberg, is inflation is not here yet and won’t be for a while. He expects “… a process that will be akin to watching grass grow.”
Time to tame your debt
So, while the grass grows the best way to prepare for inflation is to get debt under control.
Credit card debt is public enemy number one. Interest on balances owning can be in the high teens if it’s MasterCard or Visa and nearly 30 per cent for credit cards sponsored by big retailers like Hudson’s Bay Company.
For some reason absurdly high credit card payback rates are largely overlooked by customers, so credit card companies kept them at high levels when interest rates fell over the past few decades.
That doesn’t mean they won’t raise them as borrowing rates rise.
Get a debt plan
The best way to pay down credit card debt is to stop buying stuff and pay off the balance.
The second best way is to pay less in interest and more against the principal through a lower-rate loan or line of credit from a major financial institution. Your bank is a good start. The rate they offer depends on your credit history and how much business you do with the bank but 10 per cent is a good starting point.
Homeowners who have paid off a significant portion of their properties can establish a secured line of credit against the equity in their homes at about 4 per cent. The rate for secured lines of credit is generally the bank’s prime rate plus 1 per cent. Prime is currently 3 per cent but that will go up with inflation.
Lock it in
Mortgage rates are already on the rise. Homeowners can freeze their rates at current levels by locking in for long terms.
Ratehub.ca posts the best 5-year mortgage at 3.2 per cent and the best 10-year rate at 3.9 per cent.
In some cases a mortgage provider will allow you to consolidate all your debt in a fixed-rate mortgage – essentially freezing the rate on everything you owe.
If you can’t pay down all your debt at least it can chill while inflation heats up.