In this week’s EconMinute, we’re talking about inflation of different product categories.
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Inflation has become a hot topic over the past few months as restrictions have eased and consumers get back to restaurants, stores, and even traveling.
When new estimates for inflation are released, as they were this week, the focus tends to be on the headline inflation number and what this means with respect to economic recovery and Canada’s monetary policy (i.e., does the Bank of Canada need to cut back on stimulus and raise interest rates to calm inflation? Or can it continue to support the economy through lower rates?).
However, to better understand what is becoming more expensive for consumers, it is also helpful to break down the topline number into product categories. As well, it gives us a better sense for the drivers of inflation, and whether they will persist.
So, what has become more expensive for the Canadian consumer?
- The two categories with the greatest amount of inflation—transportation and shelter—each have their own story to tell.
- For transportation, which includes things like the cost of gas, purchasing a new or used car, or even a rental car, two factors are at play. One is straight-forward: the price of gas has increased as consumers started to move again, which is good for producers, but bad for consumers.
- The other factor relates to cars themselves: microchip shortages have limited production of new vehicles, driving up demand and prices for used cars. Meanwhile, rental car companies, many of which sold off vehicles to make ends meet, were met with high demand as Canadians started to travel again. This put upward pressure on the price of a rental.
- For shelter, which includes the cost of owning or renting, a different force is at play. The primary driver is the price of buying a home, which has increased due to higher demand for new homes, driven by historical low interest rates.
- Meanwhile, all other product categories have seen more modest price increases: up 2 – 4% compared with pre-pandemic levels about a year and a half ago. Over a 12-month period, that growth rate is about in line with the Bank of Canada’s target range.
Breaking this indicator down tells us two important things: one, not all consumers are necessarily experiencing substantial price increases. Those who have not purchased a new car or house, for example, may be experiencing more modest levels of inflation. Secondly, the factors impacting these top two categories are unlikely to be permanent. One concern is this could drive up wages and the cost of labour—leading to a more permanent increase in inflation—but this has yet to be seen. That said, inflation continues to be an important indicator to watch in the coming months and we will be keeping a pulse on both the topline as well as the details under the hood.