Over the past year, consumers have only consumed more than they did before the pandemic. They no longer travel, no longer spend on entertainment, they are at home and only buy in person or virtually because consumption has become one of the only powers they can still exercise.
Posted at 6:30 a.m.
But this purchasing power only contributes to rising prices, fueling scarcity and, insidiously, altering consumers’ purchasing power.
Inflation rose at an annual rate of 5.1% in January, the largest increase in 30 years, Statistics Canada reported on Wednesday.
As we know, the causes of this inflationary outbreak are multiple, but mainly induced by three distinct phenomena which are also interrelated.
First, there are the distortions – amplified by the pandemic – which have affected supply chains and aggravated the phenomenon of scarcity of certain inputs and finished products, which has put pressure on the quantity prices of consumer goods. .
There is also the labor shortage, which has pushed up the wages of several job categories, which has had the effect of pushing up the prices of many products and services.
In this regard, I can’t wait to see what it will cost us to buy a roast pork next summer, when Olymel has just granted wage increases on hiring of around 20% and more in some of its factories. Despite everything, the food processor is still looking to fill 3,000 positions in its slaughterhouses, mainly in Quebec…
Finally, there is low interest rates, which made home ownership easier for thousands of Canadian households, which enabled a record year for real estate transactions to be achieved in the country, but which contributed to the scarcity of available properties and pushed housing prices to unprecedented levels.
For a year, therefore, everything has been increasing – especially the prices of gasoline and transport, food and housing – but wages, they obviously do not progress with the same speed. The erosion of consumer purchasing power is a proven fact with which we must learn to deal.
Limit your enthusiasm
The corollary of this new inflationary economic environment is that the purchasing power of consumers continues to crumble while the latter have been blinded as never before by the mirages that purchasing power holds out to them.
The pandemic has exacerbated for many the need to consume. For two years, I have never seen so many Purolator, UPS or FedEx trucks daily crossing the quiet street where I live to drop off nonstop packages of all sizes.
Although consumer appetite was dampened slightly last December by the arrival of the Omicron variant, which slowed store traffic, there was still an 8.4% increase in real retail spending in Canada for the whole of 2021, which is a significant increase from the 2.2% contraction seen in 2020.
People have the impression of living because they consume, this is what we can call purchasing power. With the many restrictions imposed by the pandemic and the various forms of confinement, consumption has allowed many to sublimate their daily frustrations.
But this consumerist frenzy also contributed to the galloping rise in inflation – beyond the 3% threshold tolerated by the Bank of Canada – and therefore fueled the loss of consumer purchasing power, while the effect of purchasing power played to the detriment of their purchasing power.
The latest inflation statistics confirm that the Bank of Canada will begin a series of interest rate hikes in two weeks to calm things down. Could the institution imitate the US Federal Reserve and proceed with increases greater than at the rate of a single quarter point at a time? We will see it on March 2.
The rise in inflation is much more disadvantageous and even dramatic for the poorest who must devote most, if not all, of their income to trying to meet their only basic needs for food and housing. .
The rise in prices is, however, much easier to manage for households that have a large annual income, even if high inflation also erodes their purchasing power. They have the latitude to be able to mitigate its impact by putting their consumption priorities into perspective.
The upcoming rise in interest rates will reduce the ardor of excessively spendthrift consumers and put the real purchasing power into perspective. By raising the cost of borrowing money, the Bank of Canada will certainly help stem the erosion of consumers’ purchasing power over the next few months.