Canada’s inflation rate is expected to fall significantly this year. Here’s why

Ottawa –

After a sharp rise in prices, Canadian inflation is expected to fall significantly this year, with economists worried about price growth but offering little relief to Canadians who are lagging behind. do not have.

Inflation, which began to rise gradually in 2021, rose dramatically last year, peaking at 8.1% in the summer.

This is well above the 2% inflation target that the Bank of Canada is supposed to maintain.

The rise in prices was sparked by what Desjardins chief economist Jimmy Jean called a “perfect storm”: reopening the economy after COVID-19 restrictions, Russia’s invasion of Ukraine and supply chain disruptions.

As that storm continues to subside, price pressures are easing, giving a glimmer of hope that normalization of price appreciation may return.

These flickers were more pronounced in the data. Statistics Canada reported this week that headline inflation fell to 5.9% last month, down from 6.3% in December. This is a decline that can be explained by the “base year effect”.

The base year effect refers to the impact of price changes from the previous year on the calculation of the year-over-year inflation rate.

Simply put, it means that today’s prices are not rising as fast as they are compared to prices that were already rising a year ago.

Given that much of the acceleration in price growth occurred in the first half of 2022, the federal agency said annual inflation will continue to slow in the coming months.

Economists who track price changes from month to month have noticed that price pressures have eased for some time.

But as the base year effect weakens, that slowdown will become more apparent to Canadians who only know annual inflation rates.

Looking ahead, the Bank of Canada expects inflation to ease to around 3% by midyear and return to 2% in 2024. Most private sector economists predict similar numbers.

However, forecasting has a big caveat. Canada must be spared from unforeseen global events that could trigger a further rise in inflation.

As Canada’s inflation rate continues to fall, Jean warns that people should not confuse disinflation (meaning prices rising slowly) with outright deflation.

“That doesn’t necessarily mean there will be price cuts,” Jean said.

“However, if we compare this year’s price index with last year’s, the pace of increase will certainly return to something closer to normal.”

For Canadians struggling with the cost of living, slowing price growth will not relieve them of high prices.

“A good chunk of the decline in purchasing power we’ve seen in the last year or so is unfortunately likely to be permanent.”Unless and until incomes pick up.

While prices are rising, wage growth has always lagged inflation. His average hourly wage in January was up 4.5% compared to a year ago.

And for families who spend most of their budgets on food, lower headline inflation is even less meaningful. bottom.

Affordability remains a top priority for many Canadians, so Jan said, “The government will probably come under pressure to provide more assistance, especially to very needy households. will become,” he said.

But as Canada’s economy faces the possibility of a recession, most governments will face budget deficits that will force them to strike a delicate balance with spending, Jean said.

As Canadians try to regain positions lost to inflation, some will take advantage of the robust labor market to get more jobs, Jean said.

“People will continue to respond in multiple ways to putting bread on the table.”

This report by the Canadian Press was first published on February 23, 2023.