FINLAYSON: Canadians are tired after years of brutal inflation

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The last four years and more have been a rollercoaster ride for millions of Canadians.

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The pandemic, which began in early 2020, quickly led to mass layoffs (most of them temporary) and widespread disruptions to normal life, coupled with disruptions in often fragile global supply chains, later exacerbated by the war between Russia and Ukraine.

In response to these developments, governments and central banks provided unprecedented fiscal and monetary “stimulus” throughout 2020 and 2021.

All of this set the stage for soaring inflation and a cost-of-living crisis in many countries. Like most comparable countries, inflation and the cost of living in Canada soared, beginning in late 2021 and accelerating throughout 2022.

Faced with the highest inflation in four decades, the Bank of Canada responded belatedly with sharp interest rate hikes in 2022 and the first half of 2023. The central bank's abrupt shift to a restrictive monetary policy was a severe blow to the economy, dampening private sector spending and real estate activity.

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Economic growth came to a standstill in 2023 and will continue to weaken in 2024. The labor market situation has also weakened: employment growth has slowed and the unemployment rate has increased.

The good news is that the Bank of Canada's attempt to bring inflation back to its official target of 2% is working. In recent months, the increase in the Consumer Price Index (CPI), which measures the prices of goods and services, has been well below 3% year-on-year, compared with just under 7% a few years ago, and inflation slowed to 2.5% in July.

With inflation largely under control, the central bank has begun cutting its short-term policy rate from 5% in May 2024 to 4.5% today, with further cuts expected.

It is worth summarizing how inflation fears have affected the prices Canadians pay for goods and services today.

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From January 2020 to June 2024, cumulative inflation was 18%. This captures the combined price increase for the hundreds of individual items in the Consumer Price Index. The price of “shelter” has risen faster than prices in general.

Since January 2020, the housing cost component of the consumer price index has increased by a quarter. Housing costs include rent, mortgage payments, heating costs, electricity and water charges.

Food prices have also soared. Since January 2020, the food portion of the consumer price index has risen by 24%. According to the latest Canadian inflation report, food inflation has fallen to 2.4% year-on-year, but consumers are still struggling with the price shock at the supermarket.

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Transport costs – which include gasoline – have also risen by more than a fifth since the beginning of 2020.

It is clear that many Canadians have suffered from the rise in inflation from 2021 to 2024. A survey conducted by Statistics Canada a few months ago found that 45% of respondents were struggling to cover daily expenses, a far larger share than two years earlier. Those hardest hit were those on fixed incomes and younger people trying to set up their own households.

At the same time, workers have seen their purchasing power drop as wages have failed to keep pace with above-average inflation. All of this has dampened public sentiment and put incumbent governments on the defensive.

Fortunately, data suggests inflation will soon return to the official 2% target. This should ease recent cost-of-living pressures and help bolster flagging consumer and business confidence in Canada. This cannot happen soon enough.

Jock Finlayson is a senior fellow at the Fraser Institute.

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