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A Statistics Canada building and sign are pictured in Ottawa on July 3, 2019.Sean Kilpatrick/The Canadian Press

New Statistics Canada data on household income and wealth distribution provide a snapshot of how our challenging economic conditions are affecting individual Canadians quite differently. It’s a reminder that trying to gauge the impacts of overheated inflation, and the aggressive interest-rate increases designed to cool it, is no easy or straightforward task.

Statscan reported Wednesday that in the second quarter, Canada’s lower-income households (the bottom 40 per cent) had suffered a loss of net worth of 1.3 per cent over the past year – a period that coincided with the bulk of the Bank of Canada’s aggressive rate-hiking campaign. In contrast, the wealthiest 20 per cent of households got 2.7-per-cent richer.

Statscan noted that the wealth gap – the difference between the share of total wealth held by the top 20 per cent of households versus the bottom 40 per cent – widened by 0.6 percentage points year over year, “among the largest increases on record.”

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Those figures illustrate the uneven – or, some would call it, unfair – impact of the central bank’s inflation-fighting rate policy, disproportionately weighing on the Canadians who can least afford it. Statscan said that sharply higher mortgage debt easily outweighed increases in value of real estate assets for low-wealth households.

But for the wealthy, who generally don’t have the same need to carry real estate debt (many, for instance, own their homes outright), the surge in mortgage costs has had relatively little effect.

Yet the story is not so one-sided as you dig deeper into the data.

Statscan reported that lower-income Canadians enjoyed the strongest gains in disposable income over the year, with increases of 8.3 per cent for the lowest quintile of earners and 6.9 per cent for the second-lowest quintile. While the lowest-income group benefited from a federal government top-up of Old Age Security payments, the second-lowest group’s gains were largely a function of historically large wage increases.

That means that a couple of the key economic factors that the Bank of Canada has been attempting to temper with its rising interest rates – an unusually strong labour market and rising wage growth – have been disproportionately helping less-well-off Canadians, even as the bank’s rate policy has been weighing on this same group.

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Higher-income groups, in contrast, saw little to no gains in disposable income, as their wage increases were, on average, well behind the rate of inflation. On the other hand, higher interest rates did contribute to a leap of 15 per cent in investment income – a source of income heavily tilted toward wealthier Canadians.

Statscan only began publishing these quarterly income and wealth figures in 2021, and its quarterly data go back to the start of 2020, although it has tracked annual figures going back to 2010 for wealth and 1999 for disposable income.

The COVID-19 pandemic spurred demand for higher-frequency information on how pandemic shutdowns, income supports and recovery policies were transforming household finances and affecting consumption patterns.

Statscan says the data “provide additional granularity to address questions such as vulnerabilities of specific groups, and the resulting implications for economic well-being and financial stability.”

This level of detail is vital to both fiscal (government) and monetary (central bank) policy-makers, as they try to navigate a set of economic conditions and policy responses that don’t come up very often.

While we may intuitively have a sense, for instance, that persistently high inflation and sharply rising interest rates would have differing impacts on households whose financial circumstances are varied, the data provide a valuable glimpse into how these effects are actually playing out. Those outcomes aren’t as obvious as one might have expected.

For example, the numbers show that younger households’ mortgage debt, and their debt-to-disposable-income ratio, a key gauge of debt burden, have actually been in decline over the past year. It’s possibly evidence that younger Canadians are opting not to buy homes at all, given the current hostile environment for housing affordability.

However, debt-to-income ratios for households in the 35-to-55 age range – considered the prime earning years for most working Canadians – rose substantially, as their soaring mortgage debt outpaced income gains.

This report delivers some important homework for the Bank of Canada’s economic analysts, in particular, as they try to understand how the bank’s rate increases are affecting consumers. Income and wealth are both critical determinants of consumers’ willingness to spend. While they interact with interest rates, they may also, in some instances, counteract those rate hikes – delaying or reducing the bank’s intended impact of higher rates, which is to broadly slow demand and, thus, reduce inflation pressures.

The bank’s brain trust has been wrestling for months to understand whether it needs still higher rates to achieve this desired effect, or whether the transmission of the impacts of those rate increases has merely been delayed. It also must remain deeply mindful of the potential risks to financial stability, particularly to the country’s most vulnerable households, that its rate increases may pose.

These Statscan numbers might not contain all the answers. But they certainly give the central bank some critical insights into its most pressing questions.

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