As inflation continues to rise, experts say Canadians will have to hold out for a while longer before prices drop again.
“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 easing on the inflation front.”
In a report released this week, Statistics Canada said Canada’s annual inflation rate hit 7.7 percent in May, the highest since 1983.
One of the main reasons for the continued rise in inflation is the ongoing conflict in Ukraine and its impact on gas prices.
“We need to see energy prices, especially oil prices, fall sustainably before we get any meaningful relief,” Guatieri said. “Because energy costs not only hurt at the pump, but are also the main driver of input costs for virtually all supply chains of goods and transport distribution networks.”
Amy Peng, associate professor of economics at Toronto Metropolitan University, said another factor driving inflation is Canada’s longstanding relationship with the United States. She said that as long as inflation keeps rising in the US, it will rise here because the economies of our two countries are so integrated.
“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 percent. The U.S. raised its interest rate by 0.75 percent on June 15 to a range of 1.5 percent to 1.75 percent, the largest hike since 1994. The Bank of Canada last hiked the country’s interest rate to 1 on June 1 .5 percent.
“The way [to curb] Inflation is supposed to keep raising interest rates, so they’ve been doing that steadily this year,” Peng said, adding that she expects the Bank of Canada to announce the biggest rate hike since 2008, bringing Canada to 2.25 percent already in the next days.
That increase, Peng said, would come when the country is expected to hit inflation of about 8.5 percent in the next few months, bringing Canada on par with America’s inflation rate.
While Canadians may cringe at the thought of the economy getting worse over the summer, Guatieri said it’s probably the only way out of this economic downturn.
“Unfortunately, we have to see some destruction,” he said. “It implies a much weaker economy next year, but that’s a kind of medicine to cure high inflation.”
HOW CAN CANADA CORRECT INFLATION?
Peng said while Canada’s inflation is yet to peak, a sustained rise in inflation could affect consumer spending enough to make Canadians buy less, which in turn will bring inflation back down.
“How much does it affect people’s spending habits and spending patterns?” She said. “If that’s enough to make an impact on the demand side of the economy, which is what you ultimately want to see, [there is] a possibility that inflation will finally come with it.”
But according to Armine Yalnizyan, an economist and Atkinson fellow on the future of workers, consumer demand doesn’t appear to be slowing as prices for non-essential goods are also rising.
“The thing that really surprised me [the Bank of Canada’s inflation announcement] was the extent to which we are returning to discretionary spending and driving up overall price levels,” she told CTVNews.ca in reference to the increased spending on flights, hotels and other forms of recreation as pandemic-related restrictions are lifted in Canada .
“Basically, people want to party and people want to travel and there’s just not enough supply and that’s driving prices up.”
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 inflation that they contain is demand for housing by raising prices for 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 says home sales are down nearly 22 percent since last year and nearly nine percent between April and May, which experts said is a product of the Bank of Canada’s rate hike negatively impacting those who have a mortgage or hope to get one.
“And when you do that, when there’s less demand, you usually see some kind of reduction in price pressures to keep going up,” Yalnizyan said.
Another way to contain demand is to increase supply, Guatieri said. But manufacturing companies around the world face major geopolitical hurdles.
“It’s not like manufacturers are going to ramp up production of automobiles and furniture and all those other items because of the ongoing supply disruptions, partly because of the war in Ukraine, partly because of the local lockdown in China,” he said, adding Labor shortages also affect supply.
Yalnizyan said the end of the war in Ukraine, the end of the pandemic and a real movement to fight climate change are crucial in curbing inflation and improving supplies.
“You have to go back 100 years to the early 20th century and the collision of the Spanish flu with World War I to see that,” she said. “And then there were things like extreme climate events. So we have all these things that are slowing down supply.”
Without improvements in inflation rates, the results could be “devastating” for Canadians, Peng said.
“We haven’t seen that since 1983, where we have inflation at this level. And I don’t know if you remember, but the interest rate was like 10 percent, the mortgage rate was over 20 percent. That’s crazy,” she said. “We can’t live like that. … This will crash our economy.”
But as Yalnizyan points out, economic downturns 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 very difficult months ahead of us,” she said. “Not for people who have extra money, but for people who had problems before this all started. We are looking at an income inequality that has turned into a consumption inequality that is actually challenging people’s quality of life.”
With Canadian Press files
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