Inflation eases amid falling gasoline prices

REAL ECONOMY BLOG | August 16, 2022

Authored by RSM Canada

After a year of consecutive increases, inflation has finally begun to ease, hitting 7.6% on a year-over-year in July amid declining gasoline prices. Compared to June, inflation went up by a modest 0.1%.

Nonetheless, most measures of core inflation increased, which means inflation remains pervasive across all aspects of life and not just concentrated in a few categories such as gasoline and food.

The Bank of Canada is unlikely to change its trajectory of a possible 75-basis-point hike in September since uncertainties remain around the global supply chain, geopolitical conditions and the pandemic; a shock in any of these areas will push prices up again.

Even though relief at the pump is welcomed news for Canadians, it will be a while until households can breathe a sigh of relief. Wage growth stood at 5.2% year-over-year, still lagging inflation and resulting in households losing purchasing power.

Other areas of necessities such as food and housing are not doing much better. Food prices were up 9.2% from a year prior and 0.9% from June, as prices of wheat and cooking oil continued to climb as a result of global supply chain disruptions and food shortages due to the Russian invasion of Ukraine.

The impact of the Bank of Canada’s interest rate hikes is beginning to show, particularly in the housing market. Expenses for homeowners went up 6.3% from a year prior, but were down for the fourth month in a row due to decreases in housing prices.

However, there is little solace as mortgage costs went up with interest rates. Furthermore, households that have held back from buying are also renting, pushing the rental market up, with rent hikes reaching double digits in major cities across Canada. Expenses associated with rented accommodation went up 4.9% from a year before, the highest seen in decades.

It takes 18 to 24 months for interest rate hikes from the Bank of Canada to fully take effect throughout the economy; therefore the following months might see inflation retreat.

As gasoline has continued to slide, August’s inflation will likely be lower. Looking further into September, past the summer holidays, prices of items related to travel such as airfares and hotels would also recede.

The takeaway

The Bank of Canada will stay on its course of aggressive rate hikes. While this month’s inflation numbers are an encouraging start, Canada still has years to go before inflation is back down to the 2% target.