It’s always in the news and often talked about around the dinner table… inflation is a silent threat to your savings that gradually erodes your purchasing power over time.
People assume the cash in their bank—or even a stash under the mattress—is safe, but inflation nibbles at that money every day, no matter where it is. It loses value over time and if not actively managed, it can cost you in the long term.
Here, we’ll explore the risks inflation poses to your savings and how "safe" investments are often not completely risk-free.
Want the book definition? Here you go:
Inflation is the general increase in prices over time, which reduces the purchasing power of money. As goods and services become more expensive, the same amount of cash buys less than it did before.
Holding on to cash, or keeping money in low-interest accounts, will eventually lead to diminished value over time due to inflation. That’s a risk to Canadians.
So how big of a problem is this?
While Canadian data can be difficult to isolate clearly, in the UK as of December 2024, approximately £276 billion (about CAD 475 billion) was held in non-interest-bearing accounts (Financial Times). These funds are highly vulnerable to inflationary loss!
When you see the interest rate on your savings account, compare it to the published rate of inflation or "Consumer Price Index" (CPI) published by Statistics Canada. If your interest rate is below the CPI, your real return is actually negative!
We’re not alone. In Australia, recent interest rate cuts have caused savings account returns to fall below the inflation rate, leading to negative real returns for savers (News.com.au).
Canadian banks have historically been among the most stable in the world, thanks in part to strict regulations and prudent lending practices. However, they are not entirely immune to failure. The last time a Canadian bank failed was in 1996, when the Calgary-based Security Home Mortgage Corporation collapsed. Though smaller in scale compared to major banks, its failure resulted in financial losses for depositors and led to a strengthened regulatory framework under the Office of the Superintendent of Financial Institutions (OSFI).
However that doesn’t mean it will never happen! Even when banks are widely considered safe, history has shown that they can and do fail. For example, during the 2012–2013 Cypriot financial crisis, the banking sector collapsed due to excessive exposure to Greek debt. To stabilize the situation, the government implemented a controversial levy on bank deposits, impacting both insured and uninsured account holders (Wikipedia).
More recently, the 2023 collapse of Silicon Valley Bank (SVB), which was the 16th largest bank in the United States, underscored the potential risks associated with banking institutions (Investopedia).
To protect depositors, Canada and the United States have established deposit insurance schemes:
Amounts exceeding these limits remain at risk in the event of a bank failure.
Given the risks inflation poses to cash savings, it is essential to explore alternatives that help preserve purchasing power:
Inflation is an unavoidable economic force that erodes cash savings if left unchecked. Bank failures, deposit insurance limitations, and the risks of hoarding cash further emphasize the need for proactive financial management. To protect your wealth, consider investing in inflation-resistant assets and diversifying your financial strategy.
By taking the right steps today, you can ensure that your money retains its value and continues to grow in the future.