There will be little relief from inflation this year, despite the Bank of Canada’s valiant effort this week to curb further price increases with an unusually large half-point increase in its key lending rate.
It’s best to brace for continued inflation for the rest of 2022.
There have seldom been so many forces, at home and abroad, exerting upward pressure on prices.
They include the vestiges of pent-up demand from the pandemic, shortages of everything from labour to raw materials, an overstressed global supply chain, and a geopolitical crisis in Ukraine whose ripple effects include higher pump prices in the GTA.
All that too shall pass, as today’s overheated world economy begins returning to normality as early as next year. For now, though, immediate relief is not at hand.
Here are some reasons why.
Food inflation will remain high
Food and energy prices are strongly related, as consumers have already experienced with higher prices for imported food due to the spike in fuel costs. A North American shortage of truckers that predates the supply chain crisis has not helped.
Expect higher prices in the GTA, even for locally grown produce. Apples, peaches, and tomatoes grown in what the province aptly calls Foodland Ontario will be pricier when they make their welcome return to the market this summer and fall.
Ontario farmers are coping with higher prices for fuel, fertilizer and feed. And truckers hauling that produce are passing along to consumers the near-doubling in their fuel costs since 2020.
No relief in housing costs
Housing remains in short supply. And in a booming economy, most prospective buyers still aren’t balking at higher prices. Realtors forecast a mild slowdown in sales, but without a drop in today’s high price levels.
Record immigration flows are putting additional upward pressure on house prices and on rents. In the period 2021 to 2023, Canada aims to welcome about 1.3 million immigrants — about the size of Calgary. And the largest portion of them will be seeking accommodation in the GTA.
Meanwhile, private sector developers and governments at all levels have failed to create adequate housing for first-time buyers and new Canadians alike.
Higher borrowing costs
The BoC’s rate hikes will raise mortgage rates and borrowing costs across the economy.
That should help cool our overheated economy and eventually bring down inflation.
But in the short term, higher interest rates on car loans, charge cards and mortgage payments will increase the cost of living for borrowers.
So far, there have been only a few signs of consumer resistance to higher prices, and practically none in food, fuel, and housing.
The business sector hasn’t helped, hiking prices in almost knee-jerk fashion to get ahead of expected increases in their own costs. And there’s some evidence of businesses exploiting the new climate, raising prices to pad profits under the cover of the economy-wide inflation.
The Bank of Canada got off to a late start
Interest-rate hikes are only gradually effective in reducing inflation.
It is unfortunate, then, that the BoC waited until last month to begin a rate-hiking cycle that is expected to raise the bank’s key lending rate from 0.25 per cent in the winter to as much as 2.5 per cent by year’s end. That would be a whopping 10-fold increase.
But by early this year, inflationary expectations had already set in. Consumers and buyers of industrial inputs alike began quickly stocking up to get ahead of rising prices, a trend that drives prices still higher and is difficult to unwind once it sets in.
For that reason, economists expect inflation to peak at six per cent or more this year before easing later in the year, up from the 30-year high rate of 5.1 per cent in February. (StatsCan will soon release figures for March.)
Ukraine
The “Putin inflation component,” as prominent economist Mohamed El-Erian has dubbed it, describes the Ukraine war’s further disruption of already weakened global supply chains, one of the biggest contributors to inflation.
Russian President Vladimir Putin’s bombardment of Ukrainian ports has kept much of Ukraine’s prodigious wheat and corn production off the world market, driving up food prices.
The Ukraine crisis has also destabilized world oil and natural gas markets. The ripple effect of the crisis has contributed to higher GTA pump prices and home heating costs.
Epilogue
The most powerful factors driving today’s inflation are temporary. Most major economies have achieved full recovery or are close to it. That will relieve pressure on supply chains and the labour market over the next year, with resulting lower inflation.
But this is a time for governments to consider the merits of temporary price controls, especially on food; one-time cost-of-living rebates, as B.C. and Quebec have done; and surtaxes on windfall business profits. Ottawa has targeted only the financial sector for those.
Such measures would weaken one of the most punishing aspects of inflation. Which is that we feel powerless against it.
Comments are closed.