How to Manage Debt with Inflation on the Rise (and Still Climbing)

With inflation rates on the rise and consumer prices at an all-time high, we’re all feeling the pinch and seeing our grocery and gas bills grow to unmanageable amounts. We’ve asked one of our Licensed Insolvency Trustees to share some insight into increasingly high prices and offer a solution to those who were already dealing with debt and struggling to make ends meet:

Canada’s inflation rate is running red hot. On a year over year basis, in February 2022, the inflation rate was 5.7% which is the highest reported rate since August 1991. What’s most alarming is that inflation rates seem to continue to outpace projections by experts and, at times, even the Bank of Canada. 

Let’s talk about what’s to blame for this ever-rising inflation rate. A major factor is the devastating effects that the COVID pandemic had on the economy and the flood of money supply that came from crucial government supports provided to consumers and businesses in 2020 and throughout 2021. We’re also continuing to deal with the global supply chain challenges that have caused a shortage of available goods. And now, the world faces a serious geopolitical threat in the Russia/Ukraine conflict, and many financial experts predict that there is no end in sight to the current inflation crisis. While this is not the news anyone wants to hear, there are viable options to help combat the impact that inflation is having on consumers’ bank accounts—and I’ll discuss those further down in this article.

Canadians are likely to notice the biggest hit to their bank account at the local grocery store and gas station. The price of groceries has increased an average of 8%, and anyone who has gone to buy a carton of milk, or a package of meat, has realized that the price of certain products has increased by well over 10%. Also, fuel prices are skyrocketing. Canadian consumers are paying an average of $1.71 per litre for regular unleaded fuel. It seems that everywhere you go, products are simply costing a lot more money.

Another real problem people are facing is that wages have little-to-no chance of keeping up with the current rate of inflation. To use an example, if you received a 3% wage increase in 2022, and inflation is now running close to 6%, you are falling behind 3 cents on every pre-tax dollar you earn. But, since everyone pays income tax and we do not keep 100% of our pay cheques, the actual amount you are falling behind due to inflation is higher. Simply put, inflation is silently taking even more money from your income, every time you go to the grocery store, buy diapers, get fuel for your car, or take your family out for dinner. In the example above, you clearly no longer have as much disposable income compared to a year ago, despite your 3% wage increase.

The problem discussed above gets worse if you have personal debt, which many Canadians do. In fact, a recent article reported that the average Canadian has $1.73 of debt (including mortgage and non-mortgage accounts) for every $1.00 of income they earn. Other industry research has noted that some Canadians report they are just a few hundred dollars away each month from declaring insolvency. For many people, it was likely very difficult to service a high level of debt even before inflation started to spike last Fall. Now, these same consumers have less after-tax income available in their wallets due to inflation rates that are far exceeding wage growth. Unfortunately, creditors do not factor inflationary trends into the amount of required minimum debt payments that must be made each month! Canadians are being forced into changing purchasing habits, buying less goods, and potentially making critical choices on what bills get paid each month and how much. 

At the end of the day, families need to be sheltered and fed, and it might be difficult, if not impossible, for some consumers to make ongoing debt payments at the required levels. Also, we have to wait and see what the impact of continuously rising interest rates will be on consumers as central banks try to cool inflation. 

As inflation continues to reduce Canadians’ disposable income, we encourage consumers to take an honest look at their current financial situation and realize they are not alone if they’re struggling to make monthly debt payments. If you’re reading this and facing the problems discussed, and you face a reality where you know you’re probably going to be unable to keep up with your debts, we encourage you to reach out and consult a Licensed Insolvency Trustee (LIT) about your financial situation. One of those options may be filing a consumer proposal which is a process that only a LIT is authorized to facilitate. If you need help, or simply have questions about the insolvency process, please reach out to book a free consultation with Smythe Insolvency. During your initial consultation, we’ll discuss your financial situation, tell you about the debt relief options that are available to you, and help you determine which option is the best choice for your unique situation.