Generation Y – Inflation, what’s that?

“Today, we have a group of twenty, thirty and even fortysomethings who know little about bond selloffs, inflation or even what a normal Fed tightening cycle looks like” says Gluskin Sheff chief economist David Rosenberg in a note to clients.

If he’s right, even standing still will set you back. Inflation means higher prices for every day expenses like gasoline, food and clothes. It also means higher borrowing costs as central banks try to cool inflation through higher interest rates.

How bad could it get? Back in 1981 inflation hit 13 per cent compared with less than 2 per cent today, the Bank of Canada benchmark lending rate topped 21 per cent versus 1 per cent today, and five-year mortgages were over 19 per cent compared with less than 4 per cent today.  This could all come as a shock for the first generation that has accepted perpetual debt as a normal part of life. The average Canadian household currently owes more than $1.60 for every dollar of disposable income it takes in each year. In the 1990s, households held less than one dollar in debt for every dollar they brought in.

If income levels remain the same, debt will take a greater proportion of it – leaving less to pay down the principal, make purchases, or save for retirement.

Should runaway inflation hit Gen Y Canadians before they manage to retire a large portion of their current debt burden, the economy will experience the mother-of-all monsters in a form similar to a gigantic Hoover Vaccuum sucking millions out of consumer pockets in debt carrying costs.  The negative macro-economic trickle down effect on comsumer spending, manufacturing and employment would truly be catastrophic.