As inflation continues to rise, experts say Canadians will have to hold out a little longer before prices drop again.
“We may not see the peak for a few more 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-on-year inflation rate hit 7.7% in May, the highest since 1983.
One of the main reasons behind the continuing rises in inflation is the ongoing conflict in Ukraine and its impact on gas prices.
“We need to see energy prices, in particular oil, pull back on a sustained basis before we get any significant relief,” Guatieri said. “Because energy costs don’t just hurt the pump, they are also the main driver of input costs for basically all commodity supply chains and transportation distribution networks.”
Amy Peng, associate professor of economics at Metropolitan University of Toronto, said another factor driving inflation is Canada’s long-standing ties to the United States. She said that as long as inflation continues to rise in the US, it will also increase here because of the integration of the economies of our two countries.
“Note that your Federal Reserve banks make the decision first and we follow, right?” she said. “So we always have this delay effect.”
In the US, inflation is currently around 8.6%. The US raised its interest rate on June 15 by 0.75% to a range of 1.5% to 1.75%, its highest since 1994. The Bank of Canada raised the country’s interest rate for the last time to 1.5% on June 1.
“The way [to curb] inflation is to keep raising the prime rate, so they have been doing that continuously this year,” Peng said, adding that he expects the Bank of Canada to announce the biggest interest rate hike since 2008, taking Canada to 2.25% , in the next few days.
That increase, Peng said, will come if the country is forecast to hit about 8.5% inflation in the coming months, putting Canada on par with US inflation.
While Canadians might shudder to think the economy will get even worse over the summer, Guatieri said it’s probably the only way out of this economic crisis.
“Unfortunately, we’re going to need to see some destruction,” he said. “That implies a much weaker economy next year, but this is the cure for high inflation.”
HOW CANADA RUN THE COURSE OF INFLATION?
Peng said that while the peak of inflation in Canada has not yet happened, continued increases in inflation could affect consumer spending enough to see Canadians buying less, which in turn will begin to reduce inflation.
“How much is this affecting people’s spending habits, spending patterns?” she said. “If that is enough to have an impact on the demand side of the economy that you want to see, [there is] a possibility that inflation will finally come down with that.”
But according to Armine Yalnizyan, economist and Atkinson Future of Workers fellow, consumer demand doesn’t appear to be slowing as prices for non-essential items also increase.
“What really surprised me [the Bank of Canada’s inflation announcement] was the degree to which we went back to discretionary spending, driving up the overall price level,” she told CTVNews.ca, in reference to the increase in spending on flights, hotels and other forms of recreation as pandemic-related restrictions increase in the US. Canada.
“Basically, people want to party and people want to travel, and there’s just not enough supply and prices are going up.”
But Yalnizyan said the Bank of Canada’s attempts to reduce demand through higher interest rates were already working in one sector: the housing market.
“The only part of the inflation they contain is the demand for housing, driving up prices, so you’re pricing in more buyers,” she said.
Canada’s housing market cooled in May, the Canadian Real Estate Association said in a report released June 15. a product of the Bank of Canada interest rate hike, negatively impacting those with a mortgage or hoping to get one.
“And when you do that, when there’s less demand, you usually see some kind of reduction in pressure for prices to keep going up,” Yalnizyan said.
Another way to contain demand, said Guatieri, is to increase supply. But production companies around the world are facing major geopolitical hurdles.
“It’s not like producers are going to increase production of motor vehicles and mobile and all these other items because of supply disruptions, partly because of the war in Ukraine, partly because of the local lockdown in China,” he said. , adding that labor shortages are also affecting supply.
Yalnizyan said the end of the war in Ukraine, the end of the pandemic and the real move to tackle climate change are crucial when it comes to containing 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 World War I to see this,” she said. “And so we didn’t have things like extreme weather events on top of that. So we have all these things that are squeezing supply.”
With no improvement in inflation rates, Peng said the results could be “devastating” for Canadians.
“We haven’t seen this since 1983, when we have inflation at this level. And I don’t know if you remember, but the interest rate was around 10%, the mortgage rate over 20%. This is crazy,” she said. “We cannot live like this. … It will be what breaks our economy.”
But, as Yalnizyan points out, economic crises tend to affect different socioeconomic groups in different ways. Consumer demand is increasing, she said, because of those who still have disposable income, which could be part of the problem.
“I think we have some really tough months coming up,” she said. “Not for people who have extra money, but for people who were struggling before this all started. We are looking at income inequality that has turned into consumption inequality that is really challenging people’s quality of life.”
With Canadian press archives