Much of the reduction in the pace of inflation is due to a base-year effect, meaning many Canadians won’t feel much of a relief despite a slowdown in price growth.
The inflation rate slowed to 2.8% in June, a decline from 3.4% in May according to Statistics Canada.
However, much of the slowdown was due to a base-year effect, as oil prices (and thus gas prices) were elevated in June of 2022 amid demand from China as that country emerged from their prolonged lockdowns.
Gas prices are down 21.6% year-over-year. However, gas prices actually rose 1.9% from May 2023 to June 2023. In fact, gas prices have been trending upward since December of 2022, something that will be increasingly reflected in inflation stats as the mid-2022 months drop off from the year-over-year comparison.
Core inflation – which excludes gasoline – came in at 4.0% in June, down from 4.4% in May.
Grocery prices continue to surge
Decelerating inflation won’t provide as much relief as it may seem, because many key consumer staples continue to rise in price at a rapid pace.
Grocery prices rose 9.1% year-over-year in June, following a 9.0% increase in May. The price of meat rose 6.9%, bakery products rose 12.9%, and dairy products rose 7.4%.
Mortgage costs up substantially
Much of Canada’s economy is dependent on the housing market. This is a problem, since overpriced housing diverts capital from more productive uses and leaves the country vulnerable. It creates a trap where increasing interest rates is necessary to bring down prices and make life more affordable, while also making life less affordable for many people who will have higher mortgage costs.
This is what happens when a country is led by those who close off possible avenues of wealth expansion – like a strong private sector and strong oil and gas sector – while simultaneously flooding the economy with money. That money has to go somewhere, and it’s now going to less productive fixed assets like housing.
So, the fact that mortgage costs rose by a whopping 30.1% year-over-year in June is concerning. And a base-year-effect can’t really be blamed here, since Canada’s housing market has been getting more and more overpriced for quite a while.
Government spending leaves the Bank of Canada with few alternatives
The Bank of Canada made some huge errors early on when it comes to inflation.
However, they have now been put in a terrible situation by the federal government.
If the Liberals had been more restrained in terms of federal spending, there would be less inflationary pressure and thus less pressure on the Bank of Canada to raise interest rates.
Instead, the Liberals continue to spend at a rapid pace.
This leaves the Bank of Canada with the choice of either letting inflation get out of control, or raising interest rates.
They have chosen to raise interest rates, which is the right call, but it doesn’t mean it won’t be without consequences.
Because Canada’s per capita GDP growth has been stagnant for so long, it means the added debt piled up by Canadians becomes more and more burdensome. Higher interest rates add to that burden.
A country with a pro-growth government could escape from that situation, since debt really only matters relevant to the total level of wealth someone has. A country with a GDP of $1 trillion and a debt of $3 trillion would be in serious trouble, while a country with a GDP of $10 trillion and a debt of $3 trillion wouldn’t be in much trouble at all. The same goes for individual households.
But since Canada isn’t growing on a per capita basis, most people are trapped on both sides: Inflation has made everything more expensive, while rising interest rates make debt more expensive.
And, given that today’s ‘lower’ inflation represents an increase on prices that have risen substantially over the past few years, many Canadians are still going to find that an improved standard of living seems farther and farther away.
Spencer Fernando
