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The Consumer Price Index ticked up in April as a variety of costs – including gasoline, rents and mortgage interest – contributed to the first acceleration since last summer. Here’s a breakdown of everything you need to know

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Canada’s inflation rate ticked up in April as higher gas and grocery prices contributed to the first acceleration since last summer.CASEY STEFFENS/The New York Times News Service

Over the past few years, the term “inflation” has gone from an economic concept to something consumers have encountered at the grocery store, at the gas pump and more. In fact, 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? 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.


What is core inflation?

There are several core measures of consumer prices. Generally, they track a subset of items in the Consumer Price Index to gauge underlying inflation pressures. For example, a popular measure of core inflation removes energy and food costs from CPI, because those items can be quite volatile from month to month. All it takes is a winter storm in the Southern U.S. or Mexico to result in sharply higher prices for fruit and vegetables. An event like this is temporary in nature, and thus economists try to look beyond that volatility.

On the other hand, it can be dangerous to dismiss certain aspects of inflation. Gasoline and grocery prices are quite influential in consumer psychology. Consumers tend to notice these price hikes, which inform their broader views of inflation and the economy’s performance. It’s important for economists to track a range of inflation indicators to get a sense of where things are heading.


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

Canada’s inflation rate ticked up in April as a variety of costs – including gasoline, rents and mortgage interest – contributed to the first acceleration since last summer. The Consumer Price Index rose 4.4 per cent from a year earlier, following a 4.3-per-cent increase in March.

Prior to this report, the annual inflation rate had been gradually declining since hitting a peak of 8.1 per cent last June.

The numbers suggest that curbing inflation could be a long and bumpy journey. While the Bank of Canada projects inflation will simmer to around 3 per cent this summer, it has also warned that price increases in the services sector could prove sticky.

The CPI numbers, combined with a tight labour market, will test the Bank of Canada and whether it thinks interest rates are sufficiently high enough to restrain inflation.

“The risk of a return to rate hikes at the next [Monetary Policy Report] release can’t be ruled out, as staying on hold is now very dependent on seeing a slowdown in the labour market,” Avery Shenfeld, chief economist at CIBC Capital Markets, wrote in a note to clients on May 16.

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?

Open this photo in gallery:

Volunteers' van full of wood stoves and bottled water is seen before leaving to frontline villages, amid Russia's attack on Ukraine.VALENTYN OGIRENKO/Reuters

Several factors were driving the inflation run-up in 2022, including supply-chain disruptions that have led to product shortages; much higher commodity prices, which is partly because of Russia’s invasion of Ukraine; and cheap borrowing rates that fuelled a boom in home purchases.

In April, particularly, gasoline prices rose 6.3 per cent, which Statscan pinned on an OPEC+ decision to reduce oil output. Crude prices have tumbled since mid-April, which should help lower Canada’s headline inflation rate in May, provided there isn’t a late acceleration.


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 April, Canadians paid more at the gas pump, where prices rose 6.3 per cent.

Meanwhile, mortgage interest costs rose 28.5 per cent on an annual basis in April as more homeowners dealt with higher borrowing rates. Rents jumped 6.1 per cent from a year earlier. Statscan said higher interest rates may be contributing to more demand for rental units.

Which items have been most affected?

  • Gas prices: Gas prices rose 6.3 per cent in April, the largest monthly increase since October 2022 and contributing the most to the acceleration in April’s headline CPI.
  • Shelter: Mortgage interest costs rose 28.5 per cent on an annual basis in April as more homeowners dealt with higher borrowing rates. Rents jumped 6.1 per cent from a year earlier.
  • Groceries: Grocery prices rose 9.1 per cent in April, down from 9.7 per cent in March. Canadians paid more for fresh vegetables (up 8.8 per cent), coffee and tea (up 6.4 per cent) and oranges (up 12.0 per cent). Though grocery inflation seems to have peaked at more than 11 per cent in recent months. Cost increases at earlier stages of the supply chain – for instance, the prices received by farmers – have slowed dramatically, which should influence the final prices that shoppers see.

Price increases for groceries and farm products

Year-over-year percentage change

Farm prices

Groceries

12%

35%

30

10

25

8

20

6

15

4

10

2

5

0

0

-5

-2

2018

2019

2020

2021

2022

2023

Note: Farm prices are brought forward by six months to remove

lag in retail pricing.

the globe and mail, Source: statscan

Price increases for groceries and farm products

Year-over-year percentage change

Farm prices

Groceries

12%

35%

30

10

25

8

20

6

15

4

10

2

5

0

0

-5

-2

2018

2019

2020

2021

2022

2023

Note: Farm prices are brought forward by six months to remove

lag in retail pricing.

the globe and mail, Source: statscan

Price increases for groceries and farm products

Year-over-year percentage change

Groceries

Farm prices

12%

35%

30

10

25

8

20

6

15

4

10

2

5

0

0

-5

-2

2018

2019

2020

2021

2022

2023

Note: Farm prices are brought forward by six months to remove lag in retail pricing.

the globe and mail, Source: statscan


What will bring inflation down?

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

In a recent speech, Bank of Canada Governor Tiff Macklem said that several things will need to happen to successfully bring inflation under control. This includes a moderation in wage growth, a normalization of corporate pricing behaviour and lower expectations of near-term inflation.

For example, Canadian wage growth picked up in February. Average hourly wages rose 5.4 per cent to $33.16, an acceleration from the 4.5-per-cent pace in January; employers added around 22,000 positions; and the unemployment rate held steady at 5 per cent, close to an all-time low.

But despite the inflation uptick in April, the central bank is widely expected to hold its policy rate at 4.5 per cent at its next decision on June 7. Over less than one year, the central bank raised its benchmark interest rate at eight consecutive meetings before pausing in March.

On May 3, The U.S. Federal Reserve reinforced its fight against high inflation by raising its key interest rate by a quarter-point to the highest level in 16 years. However, the Fed also signalled that it may now pause its streak of 10 rate hikes, which have made borrowing for consumers and businesses steadily more expensive.


How does raising interest rates slow inflation?

Open this photo in gallery:

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.


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.

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 two years.

Central bank economists expect inflation to fall rapidly in the coming months. However, Mr. Macklem has warned that it may take longer than previously expected to get inflation back to the central bank’s 2-per-cent target, and he suggested that interest rates may need to remain elevated for some time.

“Inflation is coming down quickly and is forecast to be around 3 per cent this summer,” Mr. Macklem said after the April 12 rate announcement. “This is good news, but it is not job done,” he said. “If monetary policy is not restrictive enough to get us all the way back to the 2-per-cent target, we are prepared to raise the policy rate further to get there.”

More reading:

Inflation ticks higher in April, testing Bank of Canada rate pause

Your personal inflation rate: Calculate how you compare to the Canadian average

Yes, food inflation is about to simmer down

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


Compiled by Abigale Subdhan

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


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