As inflation continues to soar, experts say Canadians will have to get by for a bit longer before prices come back down.
“We may not see the peak for a few months,” Sal Guatieri, director and senior economist at BMO Capital Markets, told CTVNews.ca. “At least in the short term, I don’t think we’re going to see much relief on the inflation front.”
In a report released this week, Statistics Canada said Canada’s year-over-year inflation rate hit 7.7% in May, its highest level since 1983.
One of the main reasons for the continued rise in inflation is the ongoing conflict in Ukraine and its impact on gasoline prices.
“We need to see energy prices, oil in particular, pull back in a sustainable way before we get meaningful relief,” Guatieri said. “Because energy costs not only hurt the pump, but they are also the primary driver of input costs for virtually every supply chain in commodity distribution and transportation networks.”
Amy Peng, associate professor of economics at Metropolitan University of Toronto, said another factor driving up inflation is Canada’s long-standing ties to the United States. She said that as long as inflation continues to rise in the United States, it will also rise here due to the degree of integration of the economies of our two countries.
“Notice their Federal Reserve Banks make the decision first and we follow, right?” she says. “So we still have that lag effect.”
In the United States, inflation is currently around 8.6%. The United States raised its interest rate on June 15 by 0.75% to a range of 1.5% to 1.75%, its largest increase since 1994. The Bank of Canada raised the the country’s interest rate at 1.5% for the last time on June 1.
“The path [to curb] inflation is to keep raising the key interest rate, so they’ve been doing it continuously this year,” Peng said, adding that she expects the Bank of Canada to announce the biggest hike in interest rate since 2008, bringing Canada to 2.25%, as of the next few days.
The hike, Peng said, would come as the country is expected to hit around 8.5% inflation over the next few months, putting Canada in line with the US inflation rate.
While Canadians may wince at the thought of the economy getting even worse over the summer, Guatieri said that’s likely the only way out of this economic downturn.
“Unfortunately we are going to need to see some destruction,” he said. “That implies a much weaker economy over the next year, but that’s kind of the cure for high inflation.”
HOW CAN CANADA CORRECT THE COURSE ON INFLATION?
Peng said that even though the peak of inflation in Canada has not yet occurred, the continued rise in inflation could have enough impact on consumer spending for Canadians to buy less, which , in turn, will begin to bring inflation down.
“How much does this affect people’s spending habits, spending habits?” she says. “If that’s enough to impact the demand side of the economy that you eventually want to see, [there is] a possibility that inflation will eventually collapse.
But according to Armine Yalnizyan, an economist and Atkinson Fellow on the Future of Workers, consumer demand does not appear to be slowing as prices for non-essential goods also rise.
“The thing that really surprised me with [the Bank of Canada’s inflation announcement] was the degree to which we returned to discretionary spending, raising the overall price level,” she told CTVNews.ca, referring to increased spending on flights, hotels and other forms of leisure as Pandemic restrictions lift in Canada.
“Basically, people want to party and people want to travel, and there’s just not enough supply and that drives up the prices.”
But Yalnizyan said the Bank of Canada’s attempts to reduce demand through higher interest rates are already working in one industry: the housing market.
“The only part of the inflation they contain is the demand for housing by raising the prices of it, so you’re pricing in more buyers,” she said.
Canada’s housing market cooled in May, the Canadian Real Estate Association said in a June 15 report. The report said home sales fell nearly 22% from last year and nearly 9% between April and May, which experts said was a product of rising interest rates by the Bank of Canada which has a negative impact on those who have a mortgage or who hope to obtain one.
“And when you do that, when there’s less demand, you usually see some sort of reduced pressure for prices to keep going up,” Yalnizyan said.
Another way to curb demand, Guatieri said, is to increase supply. But production companies around the world face major geopolitical obstacles.
“It’s not like producers are going to ramp up production of motor vehicles and furniture and all those other items because of the ongoing supply disruptions, partly because of the war in Ukraine, partly in because of the local lockdown in China,” he said, adding that labor shortages are also impacting supply.
Yalnizyan said an end to the war in Ukraine, an end to the pandemic and a real movement to tackle climate change are all crucial when it comes to curbing inflation and improving supply.
“For 100 years, you would have to go back to the beginning of the 20th century and the collision of the Spanish flu with the First World War to see this,” she said. “And then we didn’t have things like extreme weather events on top of that. So we have all these things that are slowing down the supply.
Without any improvement in inflation rates, Peng said the results could be “devastating” for Canadians.
“We haven’t seen this since 1983, when we had inflation at this level. And I don’t know if you remember, but the interest rate was around 10%, the mortgage rate was over 20%. It’s crazy,” she said. “You can’t live like this. … This will be what will crash our economy.
But, as Yalnizyan points out, economic downturns tend to affect different socioeconomic groups in different ways. Consumer demand is increasing, she said, from those who still have disposable income, which could be part of the problem.
“I think we have some really tough months ahead,” she said. “Not for people who have extra money, but for people who were struggling before all this started. We look at income inequality that turned into consumption inequality that challenges the quality of people’s lives.
With files from The Canadian Press
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