First, let us look at the old, standard ways in which our dollar loses its purchasing power. My main source is a great overview from the Bank of Canada available here. Once again, our dollar loses approximately 50% of its purchasing power in about 35 years. So, a million dollars right now might be able to purchase only 500K worth of stuff 35 years from now. Scary, right? Bank of Canada pins that on inflation. Now, further in this particular pdf, they have a table of different staple products including groceries and their average prices in different years. The first one in the table is beef sirloin cost per pound. In 1975, a pound of it was $2.34. In 2005, it was $6.99. That is almost three times more in only 30 years, not even 35! Now, I understand there are other reasons why the price of beef sirloin outpaced the rate of inflation, and that is all fine and well. What I am concerned about, however, is that many people in our country who love beef will have to give it up altogether or switch to the cheapest cuts like beef heart and enjoy a nice steak maybe once per year. Now, replace beef with something you like that also kept going up in price over the years and you will understand just how bad this is. Now you may say it's ok Zara, people can eat something else. To that I would say that people, after working hard and paying their taxes for 35 years, should not be told that in the last stage of their life they are to give up on the last few things that give them joy before they ultimately pass on. Saving enough money to afford a nice steak when you retire, if that is what you love to eat, is only one half of the equation. Now no, the other half of the equation is not to freeze prices of beef sirloin or steak or any other cut- that kind of policy never works out long-term. We need free market ways to control the portion of the price increase that goes on top of the inflation. Otherwise, the power of our dollar goes down too fast and nobody wins long-term. Finally, another major old way in which our dollar's purchasing power is reduced is increase in the cost of manpower required to provide us with the goods we need. Yes, I am talking about the minimum wage. I am not equipped to talk about what the minimum wage should be, if there should be one and so on; this much I can admit to you. All I know is that it is a fact that, if a worker gets paid more to produce something we need and the company cannot absorb the increased cost of layer (or in some cases refuses to even try), the cost of that item to consumers becomes higher and this is a straightforward economic fact.
It is at this point we must discuss some new and "exciting" ways in which our dollar loses its purchasing power and some of these are truly scary. For this, let us look at three most important things- housing, transportation, food.
Housing is very important because most of us are no longer suited to a nomadic lifestyle. Even for nomads who exist today, some form of night time shelter is preferable. You cannot live without it. In Toronto, we see some very interested historical real estate price, and I used this website as my source. According to the graph there, in 2010 a four bedroom detached home was on average around 600K. In 2020, it is getting close to 1.5 million! Now, you may say Zara there is nothing wrong with that, it is such a good investment for anyone who got into it and Toronto is becoming such an important city and so on. Yes, but let us also agree that most of the people out there just want a home to get married in and have kids, which is what Canada needs. They are not interested in using their home as an investment vehicle and they only care about their RRSP and maybe a self-directed stocks and ETF's portfolio. Or, maybe they simply leave all investments up to the banks and just focus on their work and their families- nothing wrong with that! To these people, and that is most of us, the only conclusion is that, in 10 years, THE PURCHASING POWER OF THE CANADIAN DOLLAR IN TORONTO'S FOUR BEDROOM DETACHED HOME REAL ESTATE MARKET HAS GONE DOWN BY MORE THAN 50%! IN JUST 10 YEARS! This craziness has affected other types of residential real estate as well as home rentals and this has spilled over into the Greater Toronto Area a long time ago. So let me ask you a question. If you got a house for 600K in 2010 and it is now worth close to 1.5 million in 2020, are you suddenly a millionaire or are your 1.5 million dollars now worth-less? If you now need 1.5 million to buy that house, is your dollar not worth less than it was ten years ago? You are now a millionaire, but you can only do 3 things with that money. You can sell your house, downsize and have some spending or investing money but that means your bigger house is gone but at least you stay in Toronto. Another is to go to a different part of Ontario or a different province where you may not have family, friends or connections. Finally, you can sell and go live in a foreign country that is cheaper and eventually not have the money to come back and live in Toronto again. As this happens more and more in all major Canadian cities, we will get to a point where your 1 million dollars mean nothing in the biggest, most vibrant and most fun cities in Canada decades before you even get to retire.
Next, we have transportation- public transit and cars. Interesting things happen to our dollar's purchasing power in this category as well. Let us first look at transit by looking at the Toronto Metropass- a monthly pass for Toronto's public transit. I got my information from here. In 2010, the price of a Metropass was $121. Today, the Metropass is done through the Presto fare system and is currently around $156. I believe that is around a 29% increase in 10 years. Why is this a problem? Among working adults, a huge percentage of them work in retail, hospitality and manufacturing and are paid closer to minimum wage. In 2010 it was $10.05, and in 2020 it is $14 per hour. Now, $14 per hour was pretty progressive and a shock among both supporters and critics. However, in the years to come I do not believe that the rate of minimum wage increase will match the rate of increase of the Metropass. This could be a problem. On the other hand, we have cars. If you live in Oakville and work by Square One in Mississauga, we are talking about a 44KM drive for a round trip. This kind of distance and more is typical for many people working and commuting in the Greater Toronto area. If you work five days per week and do not take a vacation or miss a day of work, your total round trips for work for the entire year total 11,440KM! With concentration of jobs in or near big cities and still very few chances to do permanent remote work (even covid did not bring remote jobs to levels we should permanently have in this day and age), this kind of mileage or more is becoming the norm for many people. After those 11,440KM, you have 8,560KM left before you hit 20,000KM per year. Why is this a problem for our dollar's purchase power? It is a problem for it because a typical warranty on a brand new car, e.g. a Hyundai, is five years or 100,000KM- whichever comes first. This, dearest readers, would not be a problem in the past when our dollar got us a decent brand new car that for which we could put down a modest downpayment and pay off the rest in five years with a car loan. However, for years now the auto loan industry and dealerships have made a push to normalize seven year loans for new cars. So wait a second. Hyundai, for example, believes their own cars will run smoothly for five years or 100,000KM and after that good luck. THEIR OWN CARS! Yet our dollar is now paying for brand new cars over 7 years? That is not a smart bet, yet we are somehow convinced that it is. Sure, you can trade it in and get a new car after five years, but you will almost always end up with rollover debt. Now, you may say well ok Zara, people can put down more money or accept higher monthly payments or do a little bit of both and pay off the car within the warranty period. I would answer that with a question. From where? From what income that has not kept up with costs of living? You can find more information about this problem in a great CBC Marketplace video available here. They do not exactly take the same angle I do, but the facts in it are solid. If this continues, we will get to a point where we will not be able to afford almost any brand new car on the market unless we pick a 7 year loan term and spend a few years driving the car out of manufacturer warranty, or trading it in and accumulating rollover debt.
Finally, we come to food. I asked people who remember prices from 16-20 years ago to share with me what some popular grocery and even takeout/delivery items cost. Around the year 2000, you could get a 2L bottle of Coke for around 50-60 cents in major Toronto area supermarkets. In dollar stores, you could get a brand name candy for 50 cents. A standard size packet of chicken drums was around $5 or slightly less. In terms of takeout, I got some information on a Pizza Pizza special (for those who do not know, Pizza Pizza is a major pizza franchise around here). At that time they had the Mega Munch deal for 19.99 plus tax. It included, I kid you not, two medium pizzas, two toppings on each, a six pack of pop, 10 wings with a sauce, two dipping sauces and a bag of brownies! Today, Pizza Pizza sells the Mega Munch Deal for 24.99 BUT it includes a single large three toppings pizza, two sauces, 10 wings and a four pack of pop! More expensive, and not nearly as good of a deal. These are only a few examples but they illustrate a good point. There are always unforeseen factors that can make the price of food rise faster than we think it will. Now sure, you may say that the answer to this is to stop overindulging, be smart, tighten your belt, eat better amounts of food and all will be well down the road. However, this can only go so far, and as we age we need healthier and more nutritious meals just to stay alive. This, again, is a problem.
So, what can we do about it? Cutting back on products and services we need and love is possible, and I do not think that eliminating many things out of our lives altogether is a good idea because it hurts the economy and makes us depressed if we feel that we work so hard yet we get no happiness from the fruits of our labor. The first step I think is a healthy dose of fear about the future, which motivates us to work on earning more money and spend it more wisely. After that comes a period of introspection about what really matters to you. When you spend money, are you falling for a sales pitch, or are you spending your money on something you really need or want or both? What that something is, well, it varies from person to person. Oh, and it varies based on how you feel on any given year because all of us change as time goes by. Maybe you are not into premium coffee as much as you are into smoking so you drop Starbucks and just enjoy your cigarettes. Maybe you skip out on a few dinner and movie dates and use that money to book an appointment ;) There are many trade-offs, and you pick the ones that are right for you. As long as you realize the situation we are in and the facts of our dollar's purchasing power, and as long as you make a good long-term plan how to prevent it from ruining your life down the road, you will be fine more likely than not.
I hope this helps and that all this money talk did not put you to sleep. ;)