By Jock Finlayson, ICBA Chief Economist
The past four plus years have been a rollercoaster for much of the world. The onset of the COVID-19 pandemic in 2020 quickly led to mass layoffs (most temporary), business closures, and unprecedented disruptions to normal life. This was accompanied by hiccups in often-fragile global supply chains, subsequently aggravated by the Russia-Ukraine war. In turn, these developments prompted governments and central banks to provide unprecedented amounts of fiscal and monetary stimulus over the course of 2020-21. All of this set the stage for skyrocketing inflation and the emergence of a cost-of-living crisis in many countries.
In common with many other Western economies, inflation and living costs jumped in Canada, beginning in late 2021 and accelerating over 2022. Faced with the highest inflation in four decades, the Bank of Canada belatedly responded with dramatic interest rate hikes in 2022 and the first half of 2023. The bank’s abrupt shift to a restrictive monetary policy dampened consumer spending, business investment, and real estate activity. Economic growth slowed to a crawl in 2023 and has continued to lag in 2024. The labour market has also softened, with job growth downshifting and the unemployment rate moving higher.
The good news is that victory appears to be in sight for the Bank of Canada’s quest to bring inflation back to the “official” 2 per cent target. In recent months, year-over-year increases in the overall Consumer Price Index (CPI) have been running comfortably below 3 per cent, compared to 6-7 per cent a couple of years ago. With inflation mostly tamed, the central bank has started to lower its short-term policy interest rate, reducing it from 5 percent in May 2024 to 4.5 per cent today. Further cuts are expected.
It is worth summarizing how the inflation “scare” has affected the prices Canadians now face for various goods and services. We can do this by examining the trajectory of price increases across the major categories that comprise the Consumer Price Index (CPI). Figure 1 depicts the composition of CPI. Figure 2 reports by how much prices have increased for various components of the CPI “basket.”
Figure 1
Figure 2
Over the period from January 2020 to June 2024, total inflation in Canada amounted to 18 per cent. This captures and combines the increases in prices for the hundreds of individual items in the Consumer Price Index. In the decades leading up to 2020, inflation over similar 4.5-year periods would have been under 10%. Thus, cumulative inflation in Canada has been almost twice the “normal” rate since Q1 of 2020.
The price of shelter has risen noticeably faster than prices in general. Since January 2020, the shelter component of the CPI has climbed by one-quarter. Shelter costs include rents and mortgage payments, along with residential fuel, electricity and water charges.
Food prices have also increased briskly, triggering a political firestorm. Since January 2020, the food component of the Consumer Price Index is up a hefty 24 per cent. The pace of food inflation has been decelerating over the past year or so, but the absolute prices Canadians now pay in grocery stores and restaurants are significantly higher than a few years ago. And that’s before we consider the effects of “shrinkflation” – smaller package sizes and portions for many items sold in grocery stores and purchased in restaurants.
The cost of transportation – a category which includes gasoline – has also marched higher, up by more than one-fifth since early 2020. Gasoline prices have increased even faster.
It’s clear many Canadians have been hurt by the 2021-24 inflation surge. A Statistics Canada survey conducted a few months ago found that 45 per cent of respondents reported having difficulty meeting day-to-day expenses, a far bigger proportion than two years before. Those on fixed incomes and younger people striving to form separate households tend to be hardest hit. Meanwhile, workers whose pay hasn’t kept pace with inflation have seen their purchasing power diminish. All of this has soured the public mood and put incumbent governments on the defensive.
Fortunately, there is growing evidence that year-over-year inflation readings will return close to the Bank of Canada’s 2 per cent target by next year, if not sooner. That should ease recent cost of living pressures. It will also pave the way for a normalization of economic conditions and help to bolster flagging consumer and business confidence in Canada. It can’t happen soon enough.
