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Canada’s inflation rate hit 7.7% in May — its highest point since 1983 — as prices continue to rise from the grocery store to the gas station. But what, exactly, is inflation and how long will it remain at record highs? A breakdown of everything you need to know

Canada’s inflation rate hit 7.7% in May — its highest point since 1983 — as prices continue to rise from the grocery store to the gas station.CARLOS OSORIO/Reuters

Over the past few months, the term “inflation” has been unavoidable. From rising prices at the grocery store and buying gas to paying for rent and mortgages, it’s gone from being an economic concept to one that’s felt with every purchase. There can hardly be a household in Canada that hasn’t already felt staggered by inflation’s effect on most aspects of daily life.

But what, exactly, is it? Why is inflation driving up the cost of living in Canada and how does raising interest rates solve the problem? Here’s a breakdown of everything you need to know about the big I.


What is inflation and how is it calculated?

Inflation is a decline in the value of money – hence why $100 doesn’t go as far today as a decade ago.

The country’s main measure of inflation is the Consumer Price Index, which Statistics Canada calculates every month. CPI is comprised of a basket of goods and services, weighted by how people actually spend their money. For example, housing costs account for about 30 per cent of CPI, because the typical household allocates a large portion of its budget toward those costs; on the other hand, clothing and footwear is generally a smaller expense, accounting for 4 per cent of CPI.

Statscan tracks how the price of all goods and services in the CPI basket change over time, and ultimately, how that factors into the overall inflation rate. A lot of factors affect prices – how difficult a product is to find, the cost of labour and the raw materials used to make it, and competition among the places selling it, to name a few.

In June, StatsCan said it updated the CPI basket to reflect the relative importance of the goods and services bought by Canadian households, based on spending in 2021. The previous basket weights were based on 2020 purchasing patterns.

According to the Bank of Canada website, policies that stimulate economic growth can also cause inflation. For example, when people have more money, their demand for products and services can rise, and that can pull up prices.

CPI shouldn’t be confused with a cost-of-living index. Such an index measures the cost of maintaining a standard of living. Also, because the CPI basket is based on average household spending, it doesn’t always reflect an individual’s experience. For example, the escalating price of meat might not be relevant to vegetarians.

Gas prices in Canada have risen more than 55% since 2021, but how do they compare with other countries? Take a look at how the average price of gas in Canada compares with the highest and lowest in the world, and where Canada sits on the global average.

The Globe and Mail


What is Canada’s current inflation rate? How does it compare historically?

Canadian inflation accelerated to the highest rate in nearly four decades in May. Statistics Canada said the Consumer Price Index rose 7.7 per cent in May from a year earlier – up from April’s 6.8-per-cent pace. Its largest increase since January 1983 and the latest in a string of troublesome reports. The recent jump in energy prices, stoked by the Russia-Ukraine war, is having a tangible effect on the numbers.

From a broader historical perspective, inflation was north of 10 per cent in the mid-1970s and again in the early 1980s. In the early 1990s, when the Bank of Canada formally adopted maintaining low and steady inflation as its primary monetary policy objective, inflation still hovered around 5 per cent. But since the central bank set its inflation target at 2 per cent in 1995 – using interest rates to help steer inflation toward that rate – inflation has averaged very close to that target.


Why is inflation so high in Canada?

National gas prices are hitting $2 a litre and are likely to push higher in coming weeks.DARRYL DYCK/The Canadian Press

Several factors are driving the inflation run-up, including persistent supply chain disruptions and the Russia-Ukraine war, which has pushed up commodity prices. Also, as COVID-19 public-health restrictions ease, people are unleashing their pandemic savings in service industries such as travel, and the increase in demand is contributing to the price surge.


How does inflation affect the cost of living?

The price of seemingly everything is on the rise, and steeper inflation is getting tougher for Canadians to avoid.

In March, Statistics Canada said that around two-thirds of goods that make up CPI are experiencing annual price gains of more than 3 per cent, such as gasoline (39.8 per cent), shelter (6.8 per cent) and household appliances (9.4 per cent). In April, consumer prices rose 0.6 per cent.

Consumers are feeling the pressure on several fronts – from surging costs in the grocery aisle and at furniture stores, to pricey hotel rates and escalating rents. “Price pressures continued to be broad-based, pinching the pocketbooks of Canadians and in some cases affecting their ability to meet day-to-day expenses,” Statscan said in its May report.

Which items have been most affected?

  • Gas prices: Gasoline prices rose 12 per cent in May alone and were up 48 per cent from a year earlier. The national average price for regular unleaded remains north of $2 a litre.
  • Groceries: Grocery prices rose 9.7 per cent in May on an annual basis, matching the gain in April. Over the past year, the price of pasta has risen nearly 20 per cent, fresh fruit by 10 per cent and coffee by around 14 per cent.
  • Meat: The price of meat was up 10.5 per cent in March compared with the same month in 2021, with prices for fresh or frozen beef up a staggering 14.1 per cent. Meanwhile, a recent study from Dalhousie University found that meat alternatives – like faux burger patties or plant-based “chicken” nuggets – remain an average of 38 per cent more expensive than meat.
  • Household appliances: Refrigerator prices have jumped 23 per cent over the past two years, while washing machines and dishwashers have risen 11.5 per cent.
  • Lunch: Buying a soup and sandwich now costs nearly $18 on average, up 24 per cent, according to data from digital payments company Square. A hamburger costs $10.86 – up 26 per cent. And an average salad costs $12.63 – up 25 per cent. Restaurant food rose 6.8 per cent in May.
  • New homes: Canada experienced a 25.7 per cent drop in the number of homes sold over the last year and a 3.8 per cent slide in housing prices between March and April, the Canadian Real Estate Association said. The average home price last month totalled $741,517. Economists say, however, that Canada’s housing market is cooling and predict that home prices will fall as much as 20 per cent this year.
  • Additional home costs: Housing costs rose 7.4 per cent in May. Mortgage interest payments are also rising as Canadians start to cope with higher interest rates, pushing up inflation.
  • Travel: Traveller accommodation costs surged 40 per cent over the past year.

Main upward contributors to the 12-month change in the consumer price index

May 2021 to May 2022

Homeowners' replacement cost index

+11.1%

Gasoline

+48%

Food purchased

from restaurants

+6.8%

Other owned accommodation expenses

+14.8%

Purchase of passenger vehicles

+6.8%

MURAT YÜKSELIR / THE GLOBE AND MAIL,

SOURCE: STATISTICS CANADA

Main upward contributors to the 12-month change in the consumer price index

May 2021 to May 2022

Homeowners' replacement cost index

+11.1%

Gasoline

+48%

Food purchased

from restaurants

+6.8%

Other owned accommodation expenses

+14.8%

Purchase of passenger vehicles

+6.8%

MURAT YÜKSELIR / THE GLOBE AND MAIL,

SOURCE: STATISTICS CANADA

Main upward contributors to the 12-month change in the consumer price index

May 2021 to May 2022

Homeowners' replacement cost index

+11.1%

Gasoline

+48%

Purchase of

passenger vehicles

+6.8%

Other owned accommodation expenses

+14.8%

Food purchased

from restaurants

+6.8%

MURAT YÜKSELIR /

THE GLOBE AND MAIL,

SOURCE: STATISTICS CANADA

Speaking to a Bay Street audience last week, Deputy Prime Minister Chrystia Freeland cautioned that Canada is entering a turbulent period. Her speech pointed to $8.9-billion in previously announced measures that will help various Canadians with their living expenses, including a 10-per-cent increase in Old Age Security for seniors over 75 and increased funding for child care. U.S. Treasury Secretary Janet Yellen, who met with Ms. Freeland in Toronto on Monday, said the White House was considering a range of policy options to tackle inflation, including a gas tax cut.


What will bring inflation down?

Time and interest rates are considered the biggest weapons to slow inflation. That’s why central bankers have embarked on their quickest pace of interest rate hikes in decades.

In June, the Bank of Canada raised its benchmark interest rate by another half a percentage point to 1.5 per cent – its third interest-rate increase this year. The June 1 move follows rate increases in March and April, the latter of which was also a half-point increase rather than the usual quarter-point move.

Last week, the U.S. Federal Reserve hiked its key rate by three-quarters of a percentage point, bringing the target range to between 1.5 per cent and 1.75 per cent.

The Bank of Canada will make its next rate decision on July 13. Most analysts on Bay Street expect the central bank to match the Fed with its own outsized hike of 75 basis points. Several more rate hikes are expected over this year.

The Bank of Canada aims to keep inflation close to 2 per cent to keep a stable currency, but the rate has now exceeded the bank’s target range of 1 per cent to 3 per cent for a full year. That streak is expected to last a while longer with the central bank expecting inflation to average more than 5 per cent in 2022.


How does raising interest rates slow inflation?

The Bank of Canada has been moving aggressively to rein in inflation by hiking interest rates.CHRIS WATTIE/Reuters

Interest rate increases theoretically bring down inflation by prompting banks to increase interest rates on deposits, loans and mortgages. Higher interest rates encourage saving, and discourage borrowing and spending. In response, companies increase their prices more slowly or even lower them to encourage demand. This reduces inflation. Higher interest rates also work to reduce demand for goods and services, which makes it harder for companies to raise prices.

It also makes borrowing more expensive. That means higher interest rates for mortgages, home equity lines of credit, credit cards, student debt and car loans. Borrowing rates for mortgages and other loans are rising quickly, a source of potential stress for households carrying debt.

“Rising interest rates are designed to slow the economy by making borrowing more expensive. That tends to slow sectors like housing,” Bank of Canada deputy governor Toni Gravelle said in a speech on May 12. “But this slowing might be amplified this time around because highly indebted households will face high debt-servicing costs and will likely reduce household spending more than they would have otherwise.”

Interest rates and inflation are closely linked, which is why the Bank of Canada has been pushing up its key rate to try and keep inflation to a target of 2%. But it’s a careful balance between controlling inflation and not tipping the economy into a recession.

The Globe and Mail


Are wages keeping up with inflation?

In short, no. Around two-thirds of Canadians have seen inflation outpace their wage gains over the pandemic.

In April, the average hourly wage rose 3.3 per cent on an annual basis – much lower than inflation – meaning, the average worker is seeing their purchasing power decline, a trend in place for several months. Inflation-adjusted wage growth was negative in many parts of the labour market, including industries tied to the public sector – such as education and health care. Meanwhile, Canada’s job growth slowed substantially in April, adding only 15,300 positions last month.

“We’re just not seeing wage gains anywhere near the rate of inflation,” said David Macdonald, senior economist at the CCPA. “It may be that workers have yet to catch up to the fact that inflation is high, and that they should start asking for higher wage gains on a year-to-year basis.”


How long will inflation remain high?

A key concern among economists is that Canadian consumers and businesses – who negotiate wages and set prices, respectively – expect inflation to remain high for the next two years, according to Bank of Canada surveys, which could keep CPI on an elevated path for some time.

Main downward contributors to the 12-month change in the consumer price index

May 2021 to May 2022

Passenger

vehicle

registration

fees

Digital

computing

equipment

and devices

Mortgage

interest

cost

Travel

tours

Telephone

services

-2.7%

-3.3%

-7.8%

-13.5%

-28.2%

THE GLOBE AND MAIL, SOURCE: STATISTICS CANADA

Main downward contributors to the 12-month change in the consumer price index

May 2021 to May 2022

Passenger

vehicle

registration

fees

Digital

computing

equipment

and devices

Mortgage

interest

cost

Travel

tours

Telephone

services

-2.7%

-3.3%

-7.8%

-13.5%

-28.2%

THE GLOBE AND MAIL, SOURCE: STATISTICS CANADA

Main downward contributors to the 12-month change in the consumer price index

May 2021 to May 2022

Digital

computing

equipment

and devices

Passenger

vehicle

registration fees

Travel

tours

Telephone

services

Mortgage

interest cost

-2.7%

-3.3%

-7.8%

-13.5%

-28.2%

THE GLOBE AND MAIL, SOURCE: STATISTICS CANADA

The stakes are high for the central bank, which is looking to keep inflation expectations in check and guard its reputation as the steward of low and stable inflation.

“We have a full-on inflation issue, and the central banks need to play catch-up, with haste,” Bank of Montreal chief economist Doug Porter recently wrote to clients.

More reading:

Canada’s annual rate of inflation spikes to 7.7% in May, highest since 1983

Super savers are fighting rising grocery costs – and inflation – one deal at a time

Millions of Canadian workers are taking an inflation-driven pay cut, report says

Inflation nation: Why the price of seemingly everything is on the rise

Why Canada’s inflation rate is likely much higher than reported

Can’t afford steak? Don’t even think about buying veggie burgers

Going back to the office? It will cost you


Compiled by Abigale Subdhan

With reports from Matt Lundy, Erica Alini, Mark Rendell and the Canadian Press


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