Although the rate at which prices are increasing has slowed in recent months, the cost of many day-to-day basics remains elevated. Over a three year period, rent is up 21.0% and food purchased from stores is up 20.7%, contributing to an overall jump in the CPI of 12.7%.
The latest data paves the way for a fourth consecutive BoC cut to the benchmark interest rate on Oct. 23. Since June 2024, the central bank has lowered the benchmark rate by 75 basis points, from 5% to 4.25%.
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What does inflation mean?
Inflation is the rising cost of goods and services, which leads to a decrease in the purchasing power of money.
Say you have $10. Last year, a can of tomato sauce cost $5, so you could afford two cans. But the cost per can has risen to $6.50, which means now you can only afford one. Over time, you’ll be able to purchase fewer and fewer things with the same $10 of income. When your income growth does not rise in sync with inflation, your purchasing power erodes and your standard of living decreases.
What is a good rate of inflation?
Some people think we should aim for 0% inflation. However, most economists, the BoC and other central banks see some inflation as desirable and reflective of a healthy economy. The BoC manipulates the Canadian money supply, as well as interest rates, to maintain a target rate of 2% inflation—the midpoint of its inflation-control target range of 1% to 3%.
Inflation lower than 2% suggests there is an excess of supply, which means the economy is struggling; this leads to less production and fewer jobs.
Inflation higher than 2% signals that the economy is growing too quickly. Typically, this means Canadians are earning too much income—between their jobs, government benefits and other sources—and snapping up goods so fast that there are supply shortages, and therefore rising prices.
Why was inflation so high in Canada in 2023?
One of the reasons inflation increased so much in Canada in 2023 is that the federal government and the BoC worked together during the pandemic to increase the amount of money in circulation. The federal government spent north of $500 billion on pandemic-related benefits in 2020 and 2021, largely financed with bonds the BoC purchased. Canadians’ savings rate skyrocketed, and the median after-tax income increased 7% from 2019 to 2020, largely thanks to these programs.
Worried about deflation because of how many Canadians were losing their jobs due to lockdowns, the BoC decreased the key interest rate to a historic low of 0.25% to encourage investing and spending. At the same time, global events, such as the war in Ukraine and China’s COVID-zero policies, created supply shortages for commodities like grain and oil and reduced global production.
Inflation higher than 2% means the economy is growing too quickly? What?!
It means prices are rising faster than the economy is growing. This is such a blatant inversion of what should be basic economic understanding. Inflation erodes your purchasing power.
Canadian population growth is 6% by importing immigrants indicates that native canadians can not afford to have children due to lack of earnings by couples to meet standard of living in AI world.
Great article.
Hi Danielle and Justin , congrats , you are in an interesting and tough time for journalists . as you are aware students of journalists are way down as it is now recognized in this minute by minute changeing world journalists can no longer perform as their education indicate . At optimum a journalist would gather the news , go home have a latte or glen levit mull over the content , get some sleep and go over it again. this process is no longer the case , instant response is a must .
During and before the 2008 recession i was a subscriber of Money Sense and followed writers/ journalist’s view of the “Greatest Recession since the Great Depression of 1929 ” and after two years or so of disceting it there no culptrict was poined out just a little of each . I assum the writers got paid and in the end on one/group took responsibility . As I indicated previously the down fall of journalism . Around 2011 I cancelled my Money Sense subscription .