In class today, we discussed the time value of money. Rob started off with an activity where all of us had to chose between $1000 today or $1200 paid in one year’s time. I was one of the few people who pointed at the $1200. I chose it because I remembered reading somewhere that inflation was at about 3% per year, meaning that I would have chosen any value above $1030 that was paid in a year.

After doing a bit of research, it turns out I hadn’t remembered too incorrectly. The average inflation rate in Canada over the last 97 years was 3.2%. The percentage is calculated after the end of each month and the current inflation rate as of August 2012 is 1.2%. Therefore, holding all other factors constant, shouldn’t the class have chosen any in-a-year offer over $1012?

What interested me the most was that the inflation rate was broken down into individual inflation/deflation rates of certain goods and services. For example, energy prices went up by 0.8% whereas natural gas prices fell by 13.8%. From this data alone, am I allowed to assume that natural gas probably does not account for a majority of energy in Canada? I’m not sure, but it’s good food for thought!

Picture Source: Trading Economics