Inflation in Canada
Inflation is a decline in the value of money, typically measured through the consumer price index. Canada’s annual inflation rate was 5.2 per cent in February – the largest drop since April, 2020.
Inflation in Canada
What is inflation?
Inflation is a decline in the value of money – hence why $10 doesn’t go as far today as it once did. We typically measure inflation through the consumer price index, which is comprised of hundreds of goods and services, weighted by how Canadians spend their money. (As a result, more of CPI is weighted toward housing costs than clothing or gasoline purchases.)
Every month, Statistics Canada publishes new inflation figures. Generally speaking, when people refer to the inflation rate, they’re speaking about the annual percentage change in CPI for all items. However, there are many ways of parsing the data. One can look at changes over different timelines (for example, monthly) or for particular products (for example, airfares).
Policy makers often look at core measures of inflation, of which there are several. One is CPI, minus energy and food. Why are those items excluded? Prices for those products can be volatile and greatly influenced by international events. For example, bad weather in Mexico can lead to a shortage of various fruits and vegetables, driving up their prices. But those shortages – and price surges – aren’t expected to last. Thus, economists will look to core measures of inflation to get a better sense of underlying price pressures.
What is Canada’s current inflation rate right now?
In February, the annual inflation rate was 5.2 per cent. It had reached 8.1 per cent in June, which was the highest in nearly four decades.
What causes inflation? Why is it so high now?
In theoretical terms, there are a couple inflation drivers worth noting. Often, demand outpaces the economy’s capacity to produce those goods and services, known as demand-pull inflation. This can be summed up as “too many dollars chasing too few goods.”
The Bank of Canada has repeatedly said this year that demand is too strong. Subsequently, it has raised interest rates to temper that demand, aimed at slowing price growth.
Conversely, there is cost-push inflation. This occurs when there are rising costs of production – such as wages and materials – that prompt companies to raise prices or curtail production.
In today’s spell of inflation, there are numerous explanations. As of October, the largest contributor to the annual inflation rate was the price of gasoline. (Those prices shot up after Russia’s invasion of Ukraine, though they had been increasing before then.) Another big contributor is new and used cars. (A computer-chip shortage has affected auto production, leading to barren lots and scant options for consumers.) Then there’s housing. Various aspects of shelter CPI – such as mortgage interest and rents – are contributing to steep inflation.
There are further explanations. For one, Canadians saved a lot of money during the acute phases of the pandemic, leading to a reopening boom of spending on certain services, such as travel. Household disposable income also rose substantially, raising questions about overspending in the federal government’s COVID-19 income supports. The U.S. fiscal response to the pandemic was especially large, such that American consumers are creating plenty of demand in overseas markets. There’s also imported inflation. The Canadian dollar has tumbled this year, making it more expensive to buy goods in U.S. dollars.
What’s being done about inflation?
To tamp down inflation, the Bank of Canada is raising interest rates at the most aggressive pace in several decades. The bank has raised its benchmark interest rate from 0.25 per cent to 4.5 per cent in eight consecutive hikes since March 2022. The central bank is expressly trying to slow the economy and bring demand into greater balance with productive capacity, eventually driving inflation back down to the bank’s 2-per-cent target. The rate-hike campaign has led to a marked slowdown in the housing market, reflected in lower sales and prices.
Policy makers at various levels are trying to cushion the financial blow for Canadians. For instance, the federal government is doubling the goods and services tax credit for six months, which more than 10 million Canadians are slated to access. Alberta and Ontario implemented tax cuts for gasoline purchases. And the Quebec government is sending out one-time cheques to millions of residents, based on income. (The largest cheques are $600.) Some of these moves have been criticized for supporting demand and further fuelling inflation.
Will inflation go down in 2023?
That’s what households – and politicians – are hoping for. In its latest monetary policy report, the Bank of Canada said it expects the annual inflation rate to average 4.1 per cent in 2023, then return to its 2-per-cent target by the end of 2024. There appears to be progress of late. Since inflation hit 8.1 per cent in June, consumer price growth has slowed to 5.9 per cent in January. In a note to clients, BMO chief economist Doug Porter said the January figures are “clearly a big step in the right direction.”
Predicting inflation can be a difficult business. Central bankers around the world were slow to recognize the staying power of inflation as it picked up in 2021. Furthermore, inclement weather or geopolitical crises can drive up prices in unforeseen ways. The future path of inflation is uncertain, and getting back to 2 per cent won’t necessarily happen on the Bank of Canada’s timeline.