Inflation in Canada

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.

Canada’s annual inflation rate fell to 3.1 per cent in October from 3.8 per cent in September. It had reached 8.1 per cent in June, 2022, which was the highest in nearly four decades.

While recent progress has been encouraging, the Bank of Canada doesn’t project inflation will return to its 2-per-cent target until mid-2025. Some aspects of the CPI, such as groceries and various housing costs, are rising at elevated rates.

BoC officials have warned that further increases to its policy rate – now at 5 per cent – could be necessary to subdue price growth. Still, the consensus view on Bay Street is that interest rates have peaked and the Bank of Canada will start cutting rates next year.

Canada’s national annual inflation rate was 3.1 per cent in October, Statistics Canada says. Here’s how the provinces compared to the national rate.

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 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.

To tamp down inflation, the Bank of Canada raised interest rates at the most aggressive pace in several decades. The bank has raised its benchmark interest rate from 0.25 per cent in 2022 to 5 per cent on July 12, 2023. The Bank of Canada held interest rates steady at 5 per cent in October while downgrading its forecast for economic growth and warning that inflationary risks have increased.

The next interest rate announcement is December 6.

That’s what households – and politicians – are hoping for. In its July, 2023 monetary policy report, the Bank of Canada said it expects inflation will linger around 3 per cent until the middle of 2024, then gradually ease back to the 2-per-cent target by the middle of 2025. This timeline of restoring price stability is about six months longer than the central bank previously forecast.

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.