Inflation isn't the only 'flation that affects what you pay

Prices change in all kinds of ways. Some are obvious, others are not. Learn more about how different 'flations can affect you.

Discussion guide

After watching this video with your students, use this guide to explore key concepts, check for comprehension and lead a discussion.

Key concepts

• Inflation measures the rate at which prices have gone up in the past year.
• Inflation can affect not only affordability but our perception of affordability.
• Economists have coined different ‘flation terms to express unique situations defined by the rate of inflation over time and its impact on prices.
• Knowing the different types of inflation helps you understand why inflation can feel different from what the headlines say.
• The Bank of Canada aims to keep inflation low and stable to prevent many of the types of inflation in the video from happening.

Comprehension check

Ask the following questions.

How do the different examples of inflation demonstrate why the Bank needs to keep inflation low and stable?

As Canada’s central bank, the Bank has the core function of keeping inflation at around a 2% target. It does this by considering how quickly prices are increasing over time and adjusting its policy interest rate accordingly. Adjustments change the cost of borrowing. The Bank can increase the rate when inflation is too high, to cool it down. Or it can lower the rate when inflation is too low, to help stimulate the economy.  

Keeping inflation low and stable helps avoid problems at both extremes, such as deflation (falling prices) or hyperinflation (very high and fast price rises). It allows Canadians and businesses to plan for the future.

Why would the Bank want disinflation?

Disinflation is like putting the brakes on inflation when it rises too quickly. If inflation is too high above the Bank’s 2% target, disinflation is helpful. It means that inflation is coming down.

Disinflation doesn’t mean that prices will return to their levels before inflation drove them up. Rather, when inflation slows, prices are still increasing, but at a slower pace than before.

Wages and prices are both affected by inflation, so a slower rate of inflation may allow wages to catch up with the rising price of goods and services. Your perception of what an item costs today may be influenced by the past cost of that same item, but your wages have likely also increased over time.  

Why is deflation a problem?

While negative inflation and the lowering of prices may sound like a good idea, it can lead to a downward spiral. If people believe that prices will keep going lower, they may put off making some purchases, hoping for a better price later. This delay slows the economy down even more, which can lead to higher unemployment and possibly a decline in wages, too.

What makes stagflation so tricky?

In the 1970s, oil prices in Canada shot up. People had to pay so much for gas and oil, they had a lot less to spend on other things. The economy slowed and unemployment rose, causing both a recession and high interest rates. This combination of factors is known as stagflation, which is tricky to solve. A central bank can either lower the interest rate to stimulate the stagnant economy or raise it to curb high inflation, but it can’t do both at the same time.

When you go grocery shopping, what two types of ‘flation are you likely to see?

The most noticeable example found in a grocery aisle is shrinkflation. You may have already noticed shrinkflation if your bag of chips or cereal box is roughly the same size, but there is less product inside This means the price of that product is subtly rising because you are paying more for each chip or bowl of cereal.

The other negative concept for consumers is cheapflation. This happens when the prices of budget brands go up more quickly than prices of more expensive brands do, meaning the price gap between the two gets smaller. This issue affects low-income consumers the most because they often rely on a modest shopping budget. They may not have the means to substitute a name brand product for a house or budget brand.

Group discussion

Ask the following questions.

1. What is an example of shrinkflation or cheapflation you have noticed when shopping for food?
2. What international or national news have you heard recently that connects to one of the ‘flations (inflation, disinflation, deflation, cheapflation, shrinkflation, stagflation or hyperinflation) mentioned in the video?
3. Disinflation does not mean that prices fall. Knowing this, how do you understand the reactions of people who may still feel squeezed, even when the news says inflation is coming down?
4. Why is stagflation (which combines high inflation, a stagnant economy and high unemployment) especially challenging for central banks?