As inflation continues to soar, experts say Canadians will have to ride it out for a while longer before prices come back down.
“We may not see the peak for another couple of months,” Sal Guatieri, director and senior economist at BMO Capital Markets, told CTVNews.ca. “At least in the near term, I don’t think we’re going to get to see much relief on the inflation front.”
In a report released this week, Statistics Canada said Canada’s year-over-year rate of inflation hit 7.7 per cent in May, the highest it has been since 1983.
One of the major reasons behind the continued inflation increases is the ongoing conflict in Ukraine and its impact on gas prices.
“We need to see energy prices, oil in particular, pulled back on a sustained basis before we get any meaningful relief,” Guatieri said. “Because energy costs don’t just hurt at the pump, but they’re also the key driver of input costs for basically all commodities and transportation distribution networks supply chains.”
Amy Peng, an associate professor of economics at Toronto Metropolitan University, said that another factor hiking up inflation is Canada’s longstanding ties with the United States. She said as long as inflation continues to climb in the U.S., it will also rise here because of how integrated our two countries’ economies are.
“Notice that their Federal Reserve Banks make the decision first and we follow, right?” she said. “So we always have this lag effect.”
In the U.S., inflation currently sits at around 8.6 per cent. The U.S. raised its interest rate on June 15 by 0.75 per cent to a range of 1.5 per cent to 1.75 per cent, its largest hike since 1994. The Bank of Canada last raised the country’s interest rate to 1.5 per cent on June 1.
“The way [to curb] inflation is to continue raising the policy interest rate, so they have been doing that continuously this year,” Peng said, adding that she expects the Bank of Canada will announce the largest interest rate hike since 2008, bringing Canada to 2.25 per cent, as soon as the next few days.
This hike, Peng said, would come has the country is predicted to hit around 8.5 per cent inflation in the next few months, putting Canada on par with the rate of American inflation.
While Canadians may wince at the thought of the economy getting even worse over the course of the summer, Guatieri said it’s likely the only way out of this economic downturn.
“Unfortunately, we’re going to need to see some destruction,” he said. “It does imply a much weaker economy over the next year, but that is kind of the medicine to cure high inflation.”
HOW CAN CANADA CORRECT COURSE ON INFLATION?
Peng said while the peak in Canada’s inflation has yet to happen, continued rises in inflation could impact consumer spending enough to see Canadians buying less, which will in turn begin to bring inflation back down.
“How much is it affecting people’s spending habits, spending patterns?” she said. “If this is enough to have an impact on the demand side of the economy that you eventually want to see, [there is] a possibility for inflation finally to come down with it.”
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 on non-essentials also climb.
“The thing that really took me aback with [the Bank of Canada’s inflation announcement] was the degree to which we’re back to discretionary spending, pumping up the overall price level,” she told CTVNews.ca, in reference to increased spending in flights, hotels and other forms of recreation as pandemic-related restrictions lift in Canada.
“Basically, people want to party and people want to travel, and there’s just not enough supply and it’s cranking up prices.”
But Yalnizyan said the Bank of Canada’s attempts to lower demand through higher interest rates is already working in one industry: the housing market.
“The only part of inflation they contain is the demand for housing by raising the prices of it, so you’re pricing out more buyers,” she said.
Canada’s housing market cooled off in May, the Canadian Real Estate Association said in a report released June 15. The report said that home sales dropped by nearly 22 per cent since last year and almost nine per cent between April and May, which experts said was a product of the Bank of Canada’s interest rate hike negatively impacting those with a mortgage or hoping to get one.
“And when you do that, when there’s less demand, usually you see some kind of reduction in the pressure for prices to keep going up,” Yalnizyan said.
Another way of curbing demand, Guatieri said, is to increase supply. But production companies around the world are facing major geopolitical hurdles.
“It’s not like producers are going to ramp up production of motor vehicles and furniture and all these other items because of the ongoing supply disruptions, partly because of the war in Ukraine, partly because of local lockdown in China,” he said, adding that labour shortages are also impacting supply.
Yalnizyan said the end of the war in Ukraine, the end of the pandemic, and real movement on addressing climate change are all crucial when it comes to curbing inflation and improving supply.
“For 100 years, you’d 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 climate events on top of it. So we’ve just got all these things that are slowing down supply.”
Without any improvements to inflation rates, Peng said the results could be “devastating” to Canadians.
“We haven’t seen this since 1983, where we have inflation at this level. And I don’t know if you recall, but the interest rate was about 10 per cent, the mortgage rate above 20 per cent. That’s crazy,” she said. “We cannot live like that. … It’s going to 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 going up, she said, because of those who still have disposable income, which may be part of the problem.
“I think we’ve got some very difficult months coming up,” she said. “Not for people that have got extra money, but for people that were struggling before this all began. We’re looking at income inequality that has morphed into consumption inequality that is actually challenging people’s quality of life.”
With files from the Canadian Press