After a steep and rapid rise in prices in 2022, Canada’s inflation rate is expected to fall significantly this year according to observers, reassuring economists worried about runaway price growth.
Inflation, which started to climb in 2021, took off dramatically last year and peaked at 8.1% in the summer, well above the 2% inflation target that the Bank of Canada wants to maintain.
The price spike was triggered by what Desjardins Chief Economist Jimmy Jean called a “perfect storm”: the reopening of economies after COVID-19 restrictions, the invasion of Ukraine by Russia and supply chain disruptions.
This storm has started to dissipate and price pressures have eased, raising hopes that normalcy in price growth can be restored.
Take an abnormal year as a reference
In fact, Statistics Canada reported earlier this week that the headline inflation rate fell last month to 5.9% from 6.3% in December. This decline can be explained by a base year effect, which means that today’s prices are not rising as quickly because they are compared to already high prices a year ago.
Since much of the acceleration in price growth occurred in the first half of 2022, the federal agency said the annual inflation rate will continue to slow in the coming months.
Economists who track month-to-month price changes have noticed that price pressures have been easing for some time now. But as the base year effects fade, this deceleration will be more evident to Canadians.
The Bank of Canada expects inflation to fall to around 3% by mid-year and drop to 2% in 2024. Most private sector economists are also forecasting similar data.
Disinflation is not necessarily relief
However, the forecast comes with an important caveat: Canada should be spared unexpected global events that could cause inflation to rise again.
Jimmy Jean cautions that disinflation, which refers to prices rising at a slower rate, should not be confused with outright deflation. But for Canadians struggling with the cost of living, slower price growth does not mean relief from high prices.
“Much of the erosion in purchasing power that we have seen over the last year or so is likely to be permanent, unfortunately, until we see incomes increase,” according to the economist in head of Desjardins.
Throughout the price boom, wage growth has consistently lagged inflation. In January, the average hourly wage increased by 4.5% compared to a year ago.
And for families that spend a significant portion of their budget on groceries, the decline in the overall inflation rate is even less significant. In January, grocery store prices rose 11.4% year on year, showing no signs of slowing down.
With affordability still a priority for many Canadians, Jimmy Jean believes “governments are going to come under pressure to maybe provide more support, especially to households that really need it.” However, he notes that most governments will be struggling with deficits, forcing them to strike a delicate balance with spending.