October 22, 2021

Weekly EconMinute—COVID’s impact on consumer prices

In this week’s EconMinute, we’re talking about COVID’s impact on consumer prices.

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As mentioned in a previous EconMinute, inflation has become a hot topic over the past few months.

Overall, prices have undoubtedly risen much faster this year than they did last year. One issue, however, is we tend to measure inflation based on the price of a good compared with its price a year ago. Because prices didn’t rise all that much last year (or, in some instances, actually fell), it can make inflation seem high, even if consumers are not spending that much more for goods and services.

In other words, we had one year of unusually low inflation followed by another of unusually high inflation: where does that leave Albertans’ purchasing power?

Below, we answer this question and dig into what Alberta consumers are actually paying more for than they would have in the absence of COVID.

So, are Alberta consumers actually spending more and, if so, on what?

  • Overall, prices (as measured by a market basket of consumer goods) have increased by about 5.5% from September 2019 to September 2021, compared with the ~4.5% we likely would have seen in the absence of COVID. Also of note: this is higher than the national average.
  • Converted to a yearly average, this means prices increased at an annual average rate of 2.7% instead of the pre-COVID norm of 2% (i.e., roughly 35% more than they would have).
  • This means that Albertans’ purchasing power—or how much Albertans can buy with their income—has in fact declined.
  • However, this change is far from consistent across categories. Some consumers will be hurt more than others, depending on individual needs and spending patterns. Among the recent drivers of inflation are the cost of buying a new home or a new car. Higher prices in these categories will, in the short term, only affect those in the market for those goods.
  • That said, certain price increases are largely unavoidable and will raise the cost of living for all Albertans. These include food, energy, and related transportation costs.
  • On the positive side, prices have risen at below-trend levels for a range of goods and services include recreation, health and personal care, household furnishings, and clothing.

This exercise suggests a growing number of Alberta consumers are experiencing an increase in the cost of living, with the increase in food prices especially worrying. Further, businesses across the globe are growing increasingly worried about the rising cost of inputs and global supply chain bottlenecks—which means inflation could continue for some time.

Unfortunately, this likely means the Bank of Canada will need to raise interest rates to tame inflation earlier than it had hoped, which would put a damper on economic recovery.

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