Over a six-week period, as a part of the ‘Out of Pocket’ series, Global News is examining how inflation is impacting Canadians from coast to coast.
Canadians feeling their dollars stretched between high inflation and a rapid rise in borrowing costs have likely been asking the identical query for months now: when will it end?
After a 12 months that saw prices on the gas pump top $2 per litre in some parts of Canada and grocery bills soar as inflation hit highs not seen in 41 years, economists have seemed a bit more optimistic of their forecasts in 2023.
Inflation has been on the “downward slope” for months now, says Armine Yalnizyan, economist and fellow with the Atkinson Foundation.
Annual inflation looked as if it would peak for this cycle at 8.1 per cent in June of last 12 months, cooling to six.3 per cent within the December reading, in keeping with Statistics Canada.
The Bank of Canada, which undertook the fastest rate of interest hike cycle in its history to tame price pressures this past 12 months, said in January that it expects headline inflation to hit the outer certain of its one-to-three-per cent goal by mid-2023 — faster than its outlooks from last 12 months projected.
It’s too soon to say inflation has been tamed, nonetheless. The central bank noted in its own forecast that there have been caveats to the outlook, with many price pressures remaining strong or vulnerable to sudden swings.
Some items in Canadians’ baskets have held onto their robust pricing pace; food inflation, notably, stays above 10 per cent in essentially the most recent reading.
While prices on the pumps have largely receded from this past summer’s highs, the Bank of Canada flagged that the energy market is especially volatile and will mess with its outlook.
And still-strong demand for services, a good labour market and other “wildcards in the combination” are keeping the inflation horizon hazy, Yalnizyan says.
“I’ve never seen the range of opinion on where inflation is headed in my life,” she tells Global News.
“There’s absolutely no consensus on what the long run holds. Never have things been more uncertain.”
Here’s what you have to find out about where inflation stands today and where prices in your life is perhaps headed.
The inflation that Canada and far of the world experienced through 2022 was not like anything the worldwide economy had seen for the reason that Seventies and ’80s, Yalnizyan explains.
She says rampant inflation was born out of a very potent combination: a surge in demand after many COVID-19 pandemic restrictions lifted, global supply chain kinks, and the unexpected hit from Russia’s invasion of Ukraine, to call a number of.
These supply shocks made it hard for Canadians to purchase latest cars, appliances and other electronics and were also behind much of the past summer’s run-up in commodity prices including oil and gas.
“We didn’t undergo an everyday bout of inflation. We went through an inflationary period the likes of which we haven’t seen in 4 a long time due to a pandemic after which due to a war,” Yalnizyan says.
Since then, nonetheless, global supply chains have largely adapted to the brand new reality, though COVID-19 impacts linger and the Russian war still rages.
Dominique Lapointe, global macro strategist at Manulife, says consumers ought to be seeing “some improvement” in prices on many goods that were affected by the constraints last 12 months.
“Other items that were constrained by supply, corresponding to cars or furniture, electronics, those prices have also come down quite a bit over the past few months,” he says.
But Yalnizyan says at the same time as these sides of the availability chain show improvement, latest disruptions are keeping inflationary pressures higher.
Prices on the food market are being affected by bouts of agricultural disease, droughts and other severe weather across the globe, she says. The sudden lifting of COVID-19 restrictions in China late last 12 months has also opened the floodgates to fresh demand for fuel and demanding minerals, she adds.
“We’ve got numerous headwinds which will actually keep prices up above the one-to-three-per cent goal in a way that nothing central banks can do will affect.”
Despite some progress on the products side of inflation, economists who spoke to Global News say there’s more work to be done in the case of price pressures on services.
“Prices on the restaurant, prices to go on an airplane, prices to travel, personal care services. Those prices are more tied to the labour market and the proven fact that we’re missing numerous people working in these industries now, it feeds into the proven fact that prices aren’t going to come back down as quickly,” Lapointe says.
The frenzy of individuals desirous to return to in-person services after COVID-19 restrictions lifted was constrained by Canada’s stretched labour force. This pushed up travel and hospitality prices, for instance, and made dining out more costly.
Canada’s tight labour market — the country added a sturdy 150,000 jobs in January because the unemployment rate continues to hover above record lows — also means many Canadians haven’t yet been discouraged from spending, with their income holding regular.
Demand for services is showing early signs of easing, Lapointe notes, as Canadians rein in a few of their spending in response to higher rates of interest and fears a recession may not be far off. However it hasn’t even been a 12 months since rates began to rise, he notes, and it should still be months before the impact of those higher rates seeps fully into the economy.
As more Canadian homeowners come as much as their mortgage renewals, for example, they’ll be forced to renew at higher rates, eating up more of their household budget and taking away some spending demand from the inflation fuel.
“These elements take time to essentially have an effect on the economy,” he says.
The labour market is a significant piece of “uncertainty” in services inflation, in keeping with Bank of Canada governor Tiff Macklem. He said in a speech last week that top labour costs might be one in all the explanations inflation could take longer to ease.
“It’s very difficult to see the worth of products which are coming down be matched by the costs of services coming down because we simply don’t have enough people to offer those services,” notes Yalnizyan.
Concordia University economics professor Moshe Lander says that, so far, wage growth hasn’t been fuelling inflation.
“The inflation that we’ve seen over the past 12 to 18 months has not come from rising wages. It’s come from just about every little thing but rising wages,” he says.
Canadian wages are struggling to maintain up with the growing costs for shelter, fresh food and other basic necessities.
Macklem acknowledged in his speech last week that risks look like “diminishing” that Canada will see a wage-price spiral, wherein staff bid up wages to maintain pace with inflation and businesses raise prices in response, further fuelling inflation.
While average hourly wages were up 4.5 per cent in Canada last month — a slight easing from the pace at the top of 2022 — Lander says the central bank will still be on the lookout for this figure to come back down before it declares victory within the inflation fight.
To ensure that inflation to actually cool off and return to the central bank’s two per cent goal, businesses have to lower their prices or reduce the pace of hikes.
With global shipping costs returning to pre-pandemic levels, many businesses are finding these input costs are headed down. But what would encourage them to eventually lower their prices, especially as Canadians get used to paying more?
Yalnizyan says that comes from Canadians deciding they won’t pay the worth and either forgoing the acquisition or finding a less expensive alternative elsewhere — competition cutting down costs. If Canadians begin to feel the bite to their incomes, potentially through job losses, they’ll be more inclined to take up deal-hunting behaviour, she says.
Lander notes that simply because global commodity prices is perhaps lower, that doesn’t mean businesses can immediately pivot on their pricing decisions. Contracts with suppliers and contractors are set for months or years at a time, he says, and are available up for renewal at regular intervals in the identical way a home-owner’s mortgage does.
Renegotiating those lower costs, in addition to wages with employees, takes quite a bit more time than passing along higher costs to consumers, Lander explains.
“Backing that up through the availability chain, through your labour, through your capital owners, through your land owners, that’s really difficult to do. And so, it does take quite a bit longer for that to occur.”
That economic slowdown that the Bank of Canada is attempting to engineer could also be close — the central bank’s policymakers signalled last month they’d be able to pause rate hikes if inflation continues to proceed, in keeping with its forecast.
But Canada’s economy continues its strong output. The job market has yet to indicate the cracks many economists expected. And rates of interest have yet to meaningfully impact many Canadians who’re most sensitive to the rapid hikes from the past 12 months.
“The economy continues to defy expectations,” Lander says.
While some economists had predicted a recession would hit Canada in early 2023, the stronger-than-expected economic figures have led some forecasters to push their calls for a slowdown. Bank of Montreal, for example, pushed its outlook for a recession to begin within the second quarter of 2023, a full quarter later than expected.
But while the economy has held up higher than most expected within the early goings of the 12 months, Lapointe says Canada and the remaining of the world is not going to be resistant to the co-ordinated rate hikes from numerous central banks globally. Eventually, these moves will bring down economic activity and inflation with it, he says.
“The economy is more resilient than we thought,” Lapointe says.
“We thought perhaps the proven fact that rates of interest are so high immediately would decelerate the worldwide economy faster. However it takes a while, and we expect that this slowdown, it’s still coming.”
— with files from Global News’ Anne Gaviola