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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 2022

Price increases appear to have peaked midway through 2022, according to the latest Statistics Canada inflation report. Canada’s annual inflation rate hit 8.1% in June, up from 7.7% in May–the fastest price increase since January 1983. The release of July’s Consumer Price Index numbers shows reduced pressure on prices with an inflation rate of 7.6%.

Despite this slight reduction in costs, most Canadian consumers and businesses are still struggling to absorb the rapid price increases of 2022 – as a result, many turned to debt, such as personal loans, to bridge the gap.

To assess the constraint of rising costs, Finder asked more than 1,000 Canadians how they were adapting to the impact of inflation.

While most Canadians reported a reduction in their spending, 1 in 4 (24%) confessed to taking on debt to pay for higher living costs in 2022.

That means approximately 7.3 million Canadians over the age of 18 used loans or other forms of debt to cover the gap between their earnings and the rising cost of living.

Reasons Canadians are taking on debt

The recent Finder Impact of Inflation survey also asked Canadians why they chose to take on more debt in 2022, despite rising rates. The results were alarming.

According to the survey results, the following are the top 3 reasons for taking out a loan in 2022:

  1. (36%) To cover bills, such as rent, mortgage, food, transportation, etc.
  2. (24%) To consolidate existing debt
  3. (19%) To cover bills and living expenses due to job loss

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, in order 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 in favour 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. 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 Canadians (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 in order 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 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, senior finance 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

Picture not describedAlmost 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.

Picture not described1 in 10 Manitobans (10%) plan to move in 2022 in order to lower their housing costs. Not surprisingly, they also led the country in the percentage of adults who were behind on making their mortgage or rent payments (8%).

Picture not describedBoth Alberta and Ontario residents were the most likely to take out a loan due to a household job loss (22% and 22%, respectively).

Picture not describedThe 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, the increased cost of living and current or higher levels of personal debt will certainly impact Canadians, but in varying degrees depending on their earnings to debt ratio, whether they have savings, along with their ability to absorb the rising cost of living. But millions could face serious consequences in the coming years if they don't have a plan.

One area of 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 was impacting overall household budgets, many Canadians cited housing costs as a primary concern within their stretched budgets.

Picture not described4% of Canadians–approximately 1.3 million adults above age 18–reported falling behind on housing payments in 2022

Picture not describedRenters are in a more precarious housing position with 9% falling behind on housing payments as compared to 6% of homeowners with a mortgage

Picture not describedAlmost twice as many women (5%) report falling behind on their housing payments compared to men (3%)

Picture not describedThe 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%

Picture not describedDivorced 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.

Picture not describedThree 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. 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.

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.

To find the best account, check out our comparison of the best high-interest savings accounts in Canada.

#2: Continue (or start) investing

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.

To help compare discount brokerage costs, and check out the latest marketplace offers, check out our guide to trading platforms and apps in Canada.

#3: Reduce expenses

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.

To help check out the Finder guide on streaming services.

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 that are 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.

About Finder

Finder is a personal finance comparison site with a mission to help Canadians save, invest, spend wisely and grow their wealth. Each month, Finder provides half a million Canadians – and more than 10 million people globally – with independent and trustworthy financial information. Our goal is to help people make better financial decisions by providing objective, comparative insight on more than 2,000 products and services each month.

As a global fintech website and app, Finder provides consumers free access to smart money content. Whether it's expert insight, product or service comparisons or independent reviews, Finder helps consumers stay on top of their finances while saving time and money.

Finder is available to consumers in over 50 countries, including Canada, the USA, the UK, Australia, New Zealand and Singapore. Initially launched in 2006 by 3 Australians–Fred Schebesta, Frank Restuccia and Jeremy Cabral–Finder's global reach now includes more than 2,000 products and services in more than 100 financial categories and provides expert content and independent reviews to more than 10 million users each month.

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