Impact of Inflation: Canada consumer debt spikes as millions struggle with cost of living increase
More than 7 million Canadians confess to taking out loans in order to cover the rising cost of living.
Impact of inflation in 2023
Most Canadians began to take notice of the increased cost of living expenses in 2023. Almost overnight, costs associated with food, housing and transportation began consuming a much larger portion of our household budgets.
According to the International Monetary Fund (IMF), a United Nations financial institution, the average global interest rate jumped from 1.9% in 2020, to 3.4% in 2021, to 8% in 2022.(1)In Canada, inflation rates rose from historical lows of 0.72% in 2020 to 6.8% in 2022.
While it’s relatively easy to place blame for these higher costs on domestic economic policy — primarily on the Bank of Canada’s decision to raise the overnight policy rate — this inflationary surge is actually a result of various factors, including global supply chain issues, exuberant monetary stimuli as well as good old-fashioned price gouging.
Still, the impact was the same: Canadians had to adjust to higher living costs due to surging inflation in 2023.
Impact of inflation in 2022 and 2023
Towards the end of 2022, many analysts predicted that the price increases had reached their peak midway through 2022. Many of these predictions were based on Statistics Canada inflation reports, which showed that Canada’s annual inflation rate had hit 8.1% in June 2022, up from 7.7% in May 2022. At that point in time, this was the fastest price increase within the Canadian economy, since January 1983. (By July 2022, the Consumer Price Index numbers showed a slight drop in the pressure on prices with an inflation rate of 7.6%.)
For most Canadian consumers and businesses rising inflation meant a constant struggle to absorb the rapid price increases of 2022 and 2023 – as a result, many turned to debt, such as personal loans, to bridge the gap.
How Canadians respond to rising costs in 2023
To assess the impact of rising inflation, Finder asked more than 1,000 Canadians how they planned to adapt to the impact of inflation. According to the survey results of the Finder: Impact of Inflation report, 1 in 4 (24%) respondents confessed to taking on debt to pay for higher living costs in 2022. That works out to approximately 7.3 million Canadians over the age of 18, who used loans or other forms of debt to cover the gap between their earnings and the rising cost of living.
In 2023, survey results from the Finder: Consumer Sentiment Survey Q2 2023 and from the Finder: Consumer Sentiment Survey Q3 2023, showed that Canadians continued to look for ways to cut costs with food costs, entertainment and clothing topping the list for areas to cut costs.
Top 3 reasons Canadians are taking on debt
Results from the Finder: Impact of Inflation survey showed that the top three reasons for taking out a loan in 2022 included:
To cover bills, such as rent, mortgage, food, transportation, etc. — 36%
To consolidate existing debt — 24%
To cover bills and living expenses due to job loss — 19%
Men are taking on more debt but doing less about it
According to Finder: Impact of Inflation survey data, 1 in 4 Canadians use debt to help pay for fixed living expenses, such as housing, transportation and food. While there is little difference between men and women when it comes to using debt – with 25% of men and 23% of women admitting to using debt to pay for higher living costs–there was a difference in how each gender tackled their rising debt levels.
For instance, 63% of women said they are cutting back on personal extras, like clothing or entertainment, to combat the rise in their monthly expenditures. However, only 53% of men chose to take the same actions to combat the rise in living costs.
This more fiscally conservative approach to balancing the budget works for women — with 10%of women surveyed reporting that current inflation pressures had no impact on their personal budgets, compared to 16% of men. However, the rationale behind these actions is worrying. According to the Canadian Women’s Foundation, 10% of women in Canada live below the poverty line, with another 28% in need of affordable, suitable housing.(2) In the Finder: Impact of Inflation survey, women reported they were almost twice as likely (5%) to fall behind on payments for housing-related expenses, compared to 3% of men.
Young and middle-aged Canadians sinking deeper into debt
Rising living costs impact demographic groups in different ways. As expected, the youngest adults in Canada – Generation Z, or those aged 18 to 26 – reported being significantly impacted by higher living costs, with more than a quarter (26%) taking on debt to pay for increased living costs.
Surprisingly, 27% of Canadians aged 27 to 41 (millennials) and 27% of Gen X (those aged 42 to 56) also took on debt to combat recent inflationary pressures.
Even baby boomers (those between the ages of 57 and 76) were not immune to the budget strain, with 18% confessing to relying on loans and short-term debt to cover regular monthly expenses.
The biggest difference is how each generation reacts to higher living costs. Relatively few baby boomers, just 3%, plan to move to reduce housing costs; even fewer, 2%, report falling behind on mortgage payments or rent. However, two-thirds of baby boomers (66%) were actively cutting back on all spending – the highest of any generation surveyed – in order to minimize the impact of inflation in 2022.
Middle-income households are the most indebted
Perhaps one of the more frightening revelations from the Finder: Impact of Inflation survey was the level of reliance each income bracket had on debt to cover standard living expenses.
Those who earned more than $155,000 – the bottom of Canada’s highest income-tax bracket – were the least likely (13%) to take on debt to cover living expenses, followed by Canadians in the lowest income-tax bracket. Middle-income earners – those who earned a bit more than $50,000 and just over $100,000 – were the most likely to rely on debt to cover living costs.
“Middle-income earners are really struggling,” says Romana King, personal finance expert and group editor at Finder, a personal finance comparison site with a mission to help Canadians save, invest, spend wisely and grow their wealth. “Data shows that wages are not keeping pace with higher living costs and this puts middle-income earners–the bulk of Canadians–in a tough position. It forces many to start prioritizing their expenses and finding ways to make ends meet.”
Where you live impacts debt levels
Turns out that where you put down roots also impacts whether you can absorb higher living costs.
According to the Finder: Impact of Inflation survey data
Almost half of Alberta residents (47%) plan to rely on debt in 2022 to cover essential living costs, such as rent or mortgage, groceries and transportation.
1 in 10 Manitobans (10%) plan to move in 2022 to lower their housing costs. Not surprisingly, they also led the country in the percentage of adults behind in making their mortgage or rent payments (8%).
Both Alberta and Ontario residents were the most likely to take out a loan due to a household job loss (22% and 22%, respectively).
The province with the highest percentage of Canadians feeling the least impacted by inflation was Quebec, where 15% said they were unlikely to borrow funds to pay for expenses (the national average was 10%).
Impact of ongoing inflation and rising debt
The mix of rising interest rates, an increase in the cost of living and higher levels of personal debt will certainly impact Canadians, but to varying degrees. Still, there is a risk that Canadians already struggling to find ways to cut expenses could face serious consequences in the coming years if they don’t have a plan to tackle their debt and reduce their expenses.
One concern is the impact rising rates will have on housing costs.
How many Canadians are in danger of losing their homes?
When asked how inflation impacted overall household budgets, many Canadians cited housing costs as a primary concern within their stretched budgets.
4% of Canadians – approximately 1.3 million adults above age 18 – reported falling behind on housing payments in 2022
Renters are in a more precarious housing position, with 9% falling behind on housing payments as compared to 6% of homeowners with a mortgage
Almost twice as many women (5%) report falling behind on their housing payments compared to men (3%)
The demographic most at risk for falling behind on rent or mortgage payments is Gen X, with 7% reporting they are behind on housing payments compared to the national average of 4%
Divorced or separated Canadians are also more likely to fall behind on rent or mortgage payments, with 9% reporting that they were behind on housing payments in 2022.
Three times as many Gen Z (12%) vs boomers (3%) say they plan to move this year to lower housing costs
While missing rental or mortgage payments is concerning, the good news is that the vast majority of Canadians are not on the verge of losing their home. According to data collected by the Canadian Bankers Association, a trade association that represents more than 60 domestic and foreign banks in Canada, mortgage defaults rarely rise above 1% in Canada, even during the harshest economic times.(3) For instance, between 2008 and 2011, when the global economy had to contend with the credit crunch due to America’s housing market crash, the default rate on Canadian mortgages never rose above 0.5%. As of May 2022, the average rate for mortgages in arrears, across Canada, was 0.15%.
However, renters are in a more precarious position and, traditionally, hit harder during tough economic conditions or when costs start to rise. According to data collected by the Canadian Mortgage and Housing Corporation (CMHC), between 150,000 to 250,000 renters — approximately 6% of the rental market — are currently in arrears.(4)
5 smart ways to beat inflation
“It’s easy to feel overwhelmed when inflation increases the cost of living,” explains King.
“The good news is most of us have the option to control how much inflation will impact our budget. Start by creating or reviewing your budget. Then cut any unnecessary expenses. Studies show this simple act helps most of us cut about 15% off our current monthly expenses.”
For more help, consider these five tips to help you fight inflation.
#1: Get into the habit of saving
To get the most out of your earnings–and combat higher living costs–you need to focus on making your money work for you, and this starts with developing the habit of saving.
In inflationary times, the best place to start developing this habit is with an emergency fund. While most experts suggest setting aside enough money to cover three to six months’ worth of bills, the actual amount you save in your emergency fund isn’t as important as the discipline of learning to save consistently.
“Consider your emergency fund the money you set aside to pay for unexpected expenses. It’s your financial safety net,” explains King. For that reason, worry less about how much you set aside and concentrate, instead, on consistently putting those funds aside. A great option is to hold these funds in a high-interest savings account, since these bank accounts are easily accessible, but can’t be used for everyday spending. Plus, you end up earning more interest on the money you save when compared to regular savings accounts or chequing accounts.
When prices are going up, and budgets are tight, it’s easy to cut back on expenses that don’t appear to have an immediate benefit–including money used to boost retirement savings. Resist this temptation.
Historically, well-diversified investment portfolios easily outpace inflation – even when markets spike and bubbles burst. “When you invest, your money makes money and, over time, that’s how you accumulate wealth,” says King.
For new investors, consider starting with a basket of funds, such as a balanced exchange-traded fund (ETF) or use a robo-advisor. As you learn to read your portfolio earnings and become more comfortable with the process of investing, you can move to an online brokerage that allows you to trade and invest based on your personal investment strategy.
For the best online investing platforms for beginners, check out our comparison of the best robo-advisors in Canada.
For more experienced investors, consider a little comparison shopping. Reducing fees is a great way to boost returns–and another way to combat the erosion of purchasing power due to inflation.
A great way to combat rising costs is to cut back in your own budget.
Start by cutting out what you don’t need, then strategically reduce any remaining expenses.
“We often shop around for the best price when initially making a purchase,” says King, “but over time, as the price for that good or service increases, we neglect to comparison shop.”
To start, consider how and where to cut streaming services, such as Amazon Prime, Apple TV or Netflix. These recurring subscription service costs can really add up and, over time, cost you thousands of dollars. Consider what services you really use and then cancel or downgrade the rest.
Then move on to annual recurring costs, such as cellphone service, internet and home and car insurance.
#4: Consolidate debt
For Canadians currently in debt, it’s time to consider how to pay off this debt faster or to minimize the cost of this borrowed money.
For instance, consider consolidating high-interest debt into a lower-interest loan.
For example, if you carried a $10,000 balance on a credit card that charges 21.99% interest and only paid $250 per month, it would take you more than 25 years to repay that debt and cost you almost $24,000 more in interest charges. (You can see your own calculations using Credit Canada’s debt calculator.)
Keeping the same monthly payments, you could save more than $16,500 in interest charges and pay off the debt a year early just by switching to a credit card that charges 12.99% interest per year. To find a lower interest rate credit card, check out Finder’s credit card comparison guide.
Another option is to consider consolidating higher-interest debt into a lower-interest loan.
For example, consider a lower-interest loan that charges 4.7%, and you could pay off that debt in just over 16 years and pay less than $2,000 in interest charges. To help find a lower-interest personal loan, use Finder’s personal loan comparison guide.
By lowering the cost you pay to borrow money, you free up more money to pay down debt, and this reduces your overall debt burden and helps you get out of debt faster.
#5: Negotiate
The final step to beating inflation is negotiating better rates and terms on all recurring expenses you can’t or won’t give up.
“Go through your budget and make a list, then schedule a call with your provider to ask about deals, promos or ways to reduce your costs,” says King.
A good starting list includes streaming services, insurance premiums, TV cable bills, cell phone plans and gym memberships, as well as credit card interest rates.
“All of these services are great examples of recurring costs open to negotiation,” says King. “The best part is that studies prove this method of cost-cutting works. People who call and ask for lower rates are almost always successful – making this process of negotiating costs a great tool for reducing monthly expenses.”
If the service provider isn’t willing to come down in price, consider other options. This is where a few minutes of comparison shopping can help save you hundreds of dollars. Or consider asking for more – more perks or more service but at the same price. “Remember, when it comes to combatting the increased cost of living, getting more for your money is a good way to add value at the same price.”
The bottom line
Record-high inflation is likely here to stay, at least in the near term. The key is to take out smarter loans, consolidate debt, reduce expenses and save and invest where possible. By sticking to a plan, Canadians will be better able to weather the inflation storm and be better positioned for when it inevitably passes.
Finder surveyed 1,013 Canadian consumers from July 14 to 18, 2022, using Censuswide, a professional market research firm with standards based on the ESOMAR principles. Certain regions or demographic groups were omitted from more specific analyses due to a lack of statistically significant responses from that particular group. The estimated margin of error for the survey is +/- 3.08%, 95% of the time.
The results of the <em>Finder: Consumer Sentiment Survey Q2</em> (<em>Finder: CSTQ2</em>) were collected through an online Pollfish survey conducted between April 27 to 29, 2023. In the survey, 1,011 Canadians from across the country were asked about their current financial confidence, where they planned to make changes and what products or services they planned on buying or using. The estimated margin of error for the survey is +/- 3.08%, 19 out of 20 times.
The results of the <em>Finder: Consumer Sentiment Survey Q3 (CSTQ3)</em> were collected through an online Pollfish survey conducted between August 10 to 21, 2023. In the survey, 1,013 Canadians from across the country were asked about their current debt obligations, among other questions regarding money goals and financial confidence. The estimated margin of error for the survey is +/- 3%, 90% of the time.
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To make sure you get accurate and helpful information, this guide has been edited by Romana King as part of our fact-checking process.
Nicole McKnight is the Canada PR Manager at Finder. Nicole completed her Honours Bachelor of Arts (English Literature) at McMaster University and holds a certification in Corporate Communications. You can contact her at nicole.mcknight@finder.com. See full bio
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Almost half of Alberta residents (47%) plan to rely on debt in 2022 to cover essential living costs, such as rent or mortgage, groceries and transportation.
1 in 10 Manitobans (10%) plan to move in 2022 to lower their housing costs. Not surprisingly, they also led the country in the percentage of adults behind in making their mortgage or rent payments (8%).
Both Alberta and Ontario residents were the most likely to take out a loan due to a household job loss (22% and 22%, respectively).
