Cooldown

Good afternoon, everyone. Tomatoes have been on a wild ride lately, but grocery prices, while still high, have at least calmed down from last month. Statistics Canada’s latest inflation numbers landed this morning. More on that below…

In today’s newsletter:

— Leah Golob

Inflation cooled more than expected in June, thanks to lower gas prices. The annual rate slowed to 2.8 per cent from 3.2 per cent in May. Gas prices fell 10 per cent month over month as the U.S. and Iran moved toward a tentative peace agreement (which has since fallen apart). Grocery prices also eased, although checkout costs are still up 3.9 per cent from a year ago. That’s the 17th straight month grocery inflation has outpaced overall inflation. Meanwhile, the FIFA World Cup cranked up travel costs, with traveller accommodation prices jumping roughly 10 per cent year over year, primarily in Toronto and Vancouver, where games were hosted. 

As widely expected, the Bank of Canada held its policy rate steady at 2.25 per cent for the sixth straight meeting last week. Governor Tiff Macklem said policymakers are trying to steer inflation back to two per cent — the sweet spot for supporting economic recovery. But uncertainty in the Middle East continues to loom over future decisions. If gas prices climb again and stay elevated, Macklem warned that a series of rate hikes could follow. For mortgage holders with variable-rate mortgages or home equity lines of credit (HELOCs), the unchanged rate means borrowing costs remain steady, at least for now.

Canadian banks have become the TSX’s version of the AI boom. The Big Six now account for over a quarter of the index. It’s an unprecedented share, and like AI, banks may have entered “bubble territory,” says economist David Rosenberg. While the banks have reported strong earnings, higher bond yields could reignite mortgage renewal risks. The rally has also been fuelled by investors chasing gains, and if you’re late to the party, it may not make sense to pile in now. For those investors who “rode the Canadian bank wave, perhaps think about trimming your oversized holdings and keeping them at an appropriate weight in the portfolio,” he says.

Along with golf and UFC, Trump is keeping up with another favourite pastime: threatening Canada with tariffs. Over the past week, hazardous air quality alerts have been issued on both sides of the border as Canada grapples with 955 active wildfires (as of Saturday). “The U.S. is being unnecessarily invaded by filthy, polluted and unhealthy air,” Trump said, warning of new levies over Canada’s “willful negligence.” Experts say the surge in wildfires was sparked by sustained hot weather across northern Ontario since late June, combined with below-average rainfall. Scientists warn that climate change is creating hotter, drier conditions that make these kinds of wildfires more likely. 

As prenups become less taboo, more couples are trying to ward off one divorce nightmare: a stay-at-home spouse who's left with next to nothing. They're increasingly opting for a "leaving the workforce" trigger that’s activated if one spouse gives up their career to raise children. The trigger can require the working spouse to provide additional financial support to compensate for the other partner’s lost earnings. Women are still more likely than men to leave the workforce, and judges can be "surprisingly unforgiving" to stay-at-home spouses, the Wall Street Journal reports. One prenup expert says many millennial and Gen Z couples are eager for these clauses after watching their parents go through their own messy divorces. I suppose family trauma has its upsides.

We talk to Erica Nielsen, Group Head, RBC Personal Banking, about emergency funds: why you need one, how large it should be, and how to go about building it.

What does being prepared realistically look like for Canadians today? How much money do people need set aside to feel secure covering most surprise costs?

We understand that it's hard for many Canadians to build an emergency fund. One straightforward approach is the 3-6-9 emergency fund rule. If you're in a dual-income household with stable jobs, aim for a fund that covers three months of essential expenses. If you're a homeowner or supporting a family on one income, think about having enough money to cover six months. And if you're self-employed or your income fluctuates, you may want to work toward having closer to nine months’ worth set aside. I know that even three months can feel daunting, but these are goalposts, not pass/fail thresholds. Any progress is progress.

The key words here are ‘essential expenses’. Start by calculating what you actually need to pay for each month: housing, utilities, groceries, insurance, transportation. Think of it as covering the basics that keep your life running, separate from your vacation fund or new car savings.

Once someone starts building their emergency fund, where is the best place to keep and grow that money?

The most important thing is to keep your emergency fund separate from your everyday spending. When the money is in a different account, it stops looking like ‘spending’ money, and you're far less likely to chip away at it for something that isn't actually an emergency.

You also want that money to be accessible. The whole point of an emergency fund is that it's there when you need it, without delays. A high interest savings account can work well, for example. It keeps your money safe, earns some interest, and is available the moment life throws you a curveball.

Should people prioritize building their emergency fund before they start investing — or can they do both at the same time?

There's no one-size-fits-all approach. That said, I'd encourage you to think about it this way: even a modest emergency fund can change how you feel about your finances.

An emergency fund helps absorb financial shocks without derailing your longer-term goals. If you don't have that safety net and an unexpected expense hits, you might be forced to take on higher-interest debt to cover it or even pull money out of investments. Both options set you back financially. Having even a baseline emergency fund keeps the rest of your finances intact.

For many people, it can make sense to build an emergency fund first, even a small one, and then begin investing alongside it. You don't have to finish one before starting the other. That foundation of financial security can make your overall outlook feel less stressful and more sustainable.

This Q&A has been edited for length. Read the full Smart Money Q&A on our website.