In this week’s EconMinute, we’re talking about what is driving inflation rates.
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Inflation has been on Canadians’ minds since spring 2021, when the annual rate surged to a 10-year high (3.4% in April). This week, inflation was in the news even more than usual as the Bank of Canada renewed its monetary policy framework and agreed to keep a 2% midpoint inflation target. Finance Minister Chrystia Freeland also touched on inflation in the Fall Fiscal Update this week, where she estimated that inflation would fall back to the 2% target sometime late next year.
While relief may be on the horizon (albeit pending pandemic-related uncertainty), it is not here yet. The latest data reveals that Canada’s year-over-year inflation rate remained steady at 4.7% in November, the same as in October, which was an 18-year high.
Canadian consumers are paying more for goods and services than they did last year across all eight major categories: food, shelter, household items, clothing and footwear, transportation, health and personal care, recreation and education, and alcohol and tobacco. Furthermore, consumers’ purchasing power has declined. The 4.7% year-over-year increase in inflation was met with only a 2.8% wage increase over the same period.
So what exactly is driving the upward price pressure?
High inflation rates are a global phenomenon, and some of the factors driving inflation at home are also driving elevated inflation abroad, including: base effects, supply chain issues, and high energy prices.
- Base effects. A year ago, during the height of the pandemic, prices collapsed as economies closed. With the widespread re-opening of economies in 2021, prices are bouncing back to pre-pandemic levels. This leads to a high year-over-year inflation rate as prices come back from 2020 lows.
- Supply chain issues. When the pandemic shut down services, consumers rapidly shifted demand to goods. Elevated demand, combined with infrastructure disruptions (e.g. port closures, production shutdowns due to COVID outbreaks, and labour shortages), has strained supply chains and translated into surging shipping costs and, ultimately, higher prices.
- Energy prices. Oil production is not meeting current demand, and consumers are feeling the crunch of high energy prices (gasoline is 43% more expensive than a year ago). Furthermore, high energy prices are driving costs up in other areas such as manufacturing and transportation.