March 25, 2022
10 mins

Q1 2022: Report on Inflation in Canada

Are you sick of rising prices at the pump? You're not alone. Gas prices surged 41.7 percent in 2021—that's the result of current inflation in Canada, and it doesn't seem it will slow anytime soon.

We're here to help you understand what inflation means because it affects your day-to-day life. So please keep reading to learn more about inflation in Canada and how it's a hit to your bank account.

Understanding Inflation in Canada

Understanding inflation is a part of managing your finances intelligently. In short, the general level of prices is often expressed as a percentage. However, this percentage has recently risen. This increase means a currency unit such as the Canadian Dollar now buys less than it did in the past. This is inflation, and various economic factors cause it.

A more simplified explanation is the value of a given currency decreases over time. This example will help you understand how purchasing power is going down: Look at how much the average price level of a basket of goods (or services) has increased over a certain amount of time.

When Inflation in Canada is Low

It's good for the economy and your bank account if inflation of prices remains low, stable, and predictable. This means that your money keeps its value. It's also simpler to keep track of when, how much, and where you spend.

For example, when businesses know their costs, they're more likely to expand in the coming years. This predictability helps an economy grow at a steady rate, which leads to more jobs and higher incomes.

When Inflation in Canada is High

When prices rise, your money doesn't have its previous purchasing power. This means your standard of living goes down because you have less money to buy what you need.

There's a lot of uncertainty about how much things will cost one day to the next when inflation is high. So it can prove challenging for an economy to do well with high inflation because of this unpredictability.

It's tough for people who don't make enough money to keep up with rising prices, like pensioners and minimum wage workers. High inflation affects their cash flow and savings the same as those earning higher wages.

What is Deflation?

A long-term drop in prices can also affect the economy. In this case, we call it deflation. Deflation means less production and less money for people. It also means less demand from consumers and businesses, affecting price levels even more.

During the Great Depression, there was a long stretch of low prices in Canada. Over four years, prices fell by more than 20% because of a significant drop in consumer and business spending.

What Causes Inflation in Canada?

Stables prices don't change very much, so people can spend, save, or invest consistently. In addition, the cost of goods and services tends to decrease when the economy makes more than the wants and needs of the consumer base.

Conversely, the prices of goods and services tend to rise when there's more demand for them than the economy can meet. This demand causes inflation.

Does it Ever End?

Many Canadians have concerns about inflation and with good reason. Economists predict inflation in Canada will rise for the foreseeable future because of a march on commodities sparked by Russia's invasion of Ukraine. As a result, the headline rate of inflation is now expected to peak at or above 6%, which will force the Bank of Canada to raise interest rates quickly.

Canada's inflation rate has already risen well above the Bank of Canada's forecast of 5.1% during the first three months of 2022. This shows how difficult it will be to normalize prices at the Bank of Canada's 2% target rate.

What Could Happen During the Year?

The Bank of Canada must consider that rising mortgage debt might make Canada's economy more vulnerable to interest rate rises than before the pandemic. In addition, some investors fear that economic expansion will be cut short if the BOC raises rates too quickly.

What's Happening Now?

Canada's latest inflation data reported better than expected.

In February, the Consumer Price Index (CPI) hit a brand new 30-year high of 5.7%. Progress in many different business areas caused this rise. As a result, experts now think the Canadian inflation rate will hit 6% or more in the next few months and then retreat to an end-of-the-year forecast range of 3.3% to 5.8%.

The BOC Takes Actions on Inflation in Canada

The BOC recently raised its overnight rate from 0.25% to 0.50%, its bank rate to 0.75%, and its deposit rate to 0.50%. They haven't done so in three years. And more increases are coming. There's even the possibility of an infrequent half a percentage-point increase in the rate.

Money markets anticipate a 50% chance the BOC will raise interest rates again when it announces its next policy decision on April 13, 2022.

What's so Important About Inflation this Year?

The COVID-19 pandemic, the Ukraine war, and the resulting sanctions on Russia and Belarus shocked global supply chains. This has resulted in higher prices for many essential goods and services.

Neither Russia nor Ukraine are the world's top exporters. Still, they both produce energy and other commodities and distribute them globally.

After a rise of 4.8% in December 2021, Canada's inflation rose 5.1% in January for the first time since September 1991. As a result, in January 2021, the CPI rose 1.0% successively.

There was a 0.1% drop in the CPI in December 2021. However, the CPI rose 0.9% on a month-to-month basis, the most significant increase since January 2017. In January 2022, however, the CPI rose 4.3% year-over-year, the fastest rate since 1999.

COVID-19 pandemic-related concerns maintain the strain on supply chains, and consumer energy prices are still high. Many people in Canada felt the effects of rising prices for goods and services, especially grocery, fuel, and energy prices.

Housing Inflation in Canada

Housing prices rose 6.2% year-over-year in January 2022, the fastest rate since February 1990. This was also the quickest rise in rate since then.

Higher new home prices make it more expensive to maintain a home or replace it with a new one. Higher home prices also tend to affect the prices of things you own.

In contrast, when interest rates go down, borrowing costs go down, which the CPI shows through the Mortgage Interest Cost Index (MICI), which tracks new and previously-owned home prices.

Inflation of Grocery Prices

At times, inflation can make it challenging to stay within your budget. For instance, food prices went up more quickly in January 2022 than in December 2021. This last year has also been the most significant successive yearly rise since May 2009.

Prices for frozen or fresh beef, chicken, and fish increased more in January 2022 than in December 2021. Compared to last year's same month, condiments, spices, and vinegar were also up in January 2021.

Input prices and shipping costs have risen because of environmental issues, international conflicts, and supply chain constraints. These problems have led to an increase in overall food prices. As a result, people are paying more for fresh fruit and baked goods because of poor growing conditions, lack of resources, or delayed global transportation.

Fuel Inflation

Motorists in Canada had to pay more at the pump in January 2022, when the price of gasoline rose by 4.8%. Gas prices quickly rose because of worries about global oil supplies due to political events in other countries. OPEC also decided against increasing oil outputs.

January 2022 saw a smaller rise of 3.3% in gas prices year-over-year than December 2021. However, financial analysts used January 2021, when gas prices rose 6.1%, for the successive yearly comparison. This led to a slowdown in consecutive annual growth in January 2022.

Inflation by Territory

Except for Nunavut (at 2.9% year-over-year), all provinces and territories saw the CPI rise by 4% or higher from February 2021 through February 2022. Prince Edward Island led this increase with a whopping 7.4%.

As of January 2022, rent prices rose by 4.3% compared to December 2021, which was 3.9%. The rise in rent prices was partly due to people returning to the pricier urban areas of Canada.

What's Next?

Due to supply chain and labour market issues, Canadians may experience increased financial difficulty. The first edition of this year's “The Real Economy, Canada” report looks into how inflation will impact the finances of Canadians in 2022.

COVID-19 has affected Canada's food supply chain as it adapts to a post-pandemic (endemic) reality. The report also shows how the pandemic affected energy, real estate, and telecommunications and what's next for them.

More Inflation to Come

Inflation has always existed in Canada. Currently, there aren't enough goods and services available, and there's a lot of consumer and business demand. This is caused mainly by gas, food, utilities, and transportation issues.

In 2022, inflation is likely to hit 5%. By the end of the year, it could drop to 3%. A big problem for growth is inflation increasing wages and making it more expensive for businesses to operate. Again, however, analysts expect inflation to fall to 2% by 2023—which, in itself, is still a considerable problem.

Getting the supply chain back on track will largely depend on energy production, workers getting vaccinated in global manufacturing hubs, and increased supply chain activity. Also, a shortage of truck drivers could keep straining Canada's food supply chain, causing related prices to keep going up faster than the country's inflation rate.

How Labour is Affecting the Economy

The job market is still dragging on Canada's steady economic recovery. As a result, Canada's job market will have to deal with a tighter labour market and higher long-term unemployment. However, it should be noted that unemployment has dropped to just above 6% (as a result of an easing COVID-19 pandemic).

In addition, a pandemic-caused border shutdown has made it difficult for Canada to deal with its aging workforce. As a result, immigrant labour has been tougher to procure. However, researchers expect immigration to rise in 2022, positively affecting the job market.

Unemployment is still higher than before COVID-19 because of a lack of skills. People who have at least some postsecondary education are in the best position to find employment. Unfortunately, there haven't been enough jobs for people who don't have a college degree to return to pre-pandemic levels.

There has also been a significant increase in jobs available to people who want to work from home. For example, professional services jobs jumped almost 10%, outpacing any other sector in Canada.

What Should We Expect from Inflation in Canada?

Canadians have had a bumpy ride over the last year. The promise of mass vaccinations was quickly followed by supply chain problems, a global energy crisis, and rising prices, which hurt the economy. In the future, however, people and businesses in Canada will have to deal with problems like the Omicron variant of the coronavirus or an endemic virus similar to the annual flu.

A lot needs to happen to solve supply chain disruptions. For instance, we need to see more energy production and mass vaccination initiatives in Central and Southeast Asia. These actions could help improve the movement of goods and address the shortage of essential workers in the supply chain.

The More You Know

Understanding inflation in Canada will help you prepare financially for the years to come. Some Canadians use investments as a hedge against inflation.

Suppose you're a younger investor or have a high tolerance for investment risk. In that case, you might consider adding cryptocurrency to your portfolio to offset “fiat currency” inflation risk. Its high earning potential could help you hedge against inflation. Bearing this in mind, take the time to review our in-depth look at cryptocurrency.

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