It would be one thing if lofty inflation was confined to durable goods, such as dishwashers and couches. Many households could punt those purchases to a later date, hoping that jammed supply chains would normalize and prices would follow suit.
Instead, this recent bout of high inflation is unavoidable.
The annual inflation rate for frequently purchased items was 6.8 per cent in February, compared with 4.6 per cent for less frequently purchased goods and services, according to Philip Smith, a retired economist and the former assistant chief statistician at Statistics Canada.
As part of his analysis, Mr. Smith divvied up everything that goes into the consumer price index into two camps, with the more frequently purchased items including much of what we need to survive: food, electricity, water and rent, along with gasoline.
There’s a body of economic research on frequency bias, showing that regularly purchased goods (such as food and gas) have an outsized impact on the public’s inflation expectations, particularly when those prices are rising quickly, as they are today. That’s a concern for central bankers, who want to keep inflation expectations in check, given that companies set prices and workers negotiate wages in anticipation of future costs.
If the public thinks high inflation is the new normal, the Bank of Canada could be forced to raise interest rates in aggressive fashion. Thus far, the central bank says long-term expectations of inflation are “well anchored.” However, Bank of Nova Scotia recently published a report that argued expectations became unmoored in late 2021. The bank sees a speedy course of rate hikes, from 0.5 per cent to 2.5 per cent by year’s end.
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