Roderic Diaz m.
Inflation, which began in 2021, has been delayed since last year’s show, dropping to 8.1% in the summer.
This figure should maintain the Bank of Canada’s 2% growth target well above.
The price spike was driven by what Desjardins Chief Economist Jimmy Jean called “the perfect storm”: a cooling of the economy following COVID-19 restrictions, Russia’s invasion of Ukraine and a breakdown in supply chains.
As that storm continues to dissipate, pressure on prices has calmed, giving signs of hope that normal price growth may be restored.
Those lights are now more visible in the data. Statistics Canada recently reported that the headline inflation rate fell in January to 5.9% from 6.3% in December and 6.8% in November, a decline that can be explained by a “base year effect”.
The impact year effect refers to the impact of price movements from the previous year on the year-over-year growth rate.
It simply means that the current prices do not rise as fast, because the prices are already compared to a year ago.
While much of the acceleration in price growth took place in the first half of 2022, the federal agency noted that the annual growth rate will continue to slow down in the coming months.
Economists who track month-to-month price changes have long noted rising price pressures.
But when the base year’s performance fails, that slowdown will become more apparent to Canadians familiar only with annual growth.
Looking ahead, the Bank of Canada expects growth to decline to 3% mid-year and return to 2% in 2024. Most private investors expect similar numbers.
However, the forecasts come with an important caveat: Canada must be protected from unexpected global events that could drive another wedge into growth.
As Canada’s inflation rate continues to decline, don’t confuse disinflation, which means a slower rise in prices, with outright deflation.
“There is no need for prices to go down,” said John. “But the growth rate, if we compare the price index to last year, will certainly return to something closer to normal.”
For Canadians who have struggled to live with the price, slower price growth does not mean relief from high prices.
“Unfortunately, there has been a lot of erosion in purchasing power over the past year,” said John.
For all price hikes, wage increases are always lagging behind inflation. In January, average hourly wages increased 4.5% over the previous year.
Households that spend a significant portion of their budget on groceries have a more or less significant decline in overall growth. In January, food prices rose 11.4% year-on-year, showing no signs of slowing down.
With affordability still a top priority for many Canadians, John said, “There will be pressure on the government to perhaps offer more financial assistance, especially to families in greatest need.”
But as the Canadian economy struggles with a potential recession, Jean said most governments will have to run deficits to find a more balanced way to spend.
