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Inflation is a decline in the value of money, typically measured through the consumer price index. Canada’s inflation rate dropped to 2.8 per cent in February 2024, falling back within the Bank of Canada’s target range for the second straight month

Inflation in Canada

What is inflation?

Inflation is a decline in the value of money – hence why $10 doesn’t go as far today as it once did. We typically measure inflation through the consumer price index, which is comprised of hundreds of goods and services, weighted by how Canadians spend their money. (As a result, more of CPI is weighted toward housing costs than clothing or gasoline purchases.)

Every month, Statistics Canada publishes new inflation figures. Generally speaking, when people refer to the inflation rate, they’re speaking about the annual percentage change in CPI for all items. However, there are many ways of parsing the data. One can look at changes over different timelines (for example, monthly) or for particular products (for example, airfares).

Policy makers often look at core measures of inflation, of which there are several. One is CPI, minus energy and food. Why are those items excluded? Prices for those products can be volatile and greatly influenced by international events. For example, bad weather in Mexico can lead to a shortage of various fruits and vegetables, driving up their prices. But those shortages – and price surges – aren’t expected to last. Thus, economists will look to core measures of inflation to get a better sense of underlying price pressures.

What is the inflation rate in Canada now?

Canada’s inflation rate fell to 2.8 per cent in February, down from 2.9 per cent in January. It had reached 8.1 per cent in June, 2022, which was the highest in nearly four decades.

The inflation rate has fallen back within the Bank of Canada’s target range of 1 per cent to 3 per cent for two consecutive months – the first time that’s happened since early 2021. (The bank aims for the midpoint, 2 per cent, of that range.) Inflation is also tracking lower than the bank’s estimate for this quarter.

The BoC has effectively closed the door on further rate hikes, meaning its next move will be to lower its policy rate from the current 5 per cent. Still, central bankers are concerned that easing monetary policy too early could reignite inflation and force them to raise rates again.

What is the inflation rate by province?

Canada’s annual inflation rate fell to 2.8 per cent in February, Statistics Canada says. Here’s how the provinces compared to the national rate.

What causes inflation? Why is it so high now?

In theoretical terms, there are a couple inflation drivers worth noting. Often, demand outpaces the economy’s capacity to produce those goods and services, known as demand-pull inflation. This can be summed up as “too many dollars chasing too few goods.”

The Bank of Canada has repeatedly said that demand is too strong. Subsequently, it has raised interest rates to temper that demand, aimed at slowing price growth.

Conversely, there is cost-push inflation. This occurs when there are rising costs of production – such as wages and materials – that prompt companies to raise prices or curtail production.

In today’s spell of inflation, there are numerous explanations. A key contributor higher inflation was gasoline. (Those prices shot up after Russia’s invasion of Ukraine, though they had been increasing before then.) Another big contributor was new and used cars. (A computer-chip shortage has affected auto production, leading to barren lots and scant options for consumers.) Then there’s housing. Various aspects of shelter CPI – such as mortgage interest and rents – are contributing to steep inflation.

There are further explanations. For one, Canadians saved a lot of money during the acute phases of the pandemic, leading to a reopening boom of spending on certain services, such as travel. Household disposable income also rose substantially, raising questions about overspending in the federal government’s COVID-19 income supports. The U.S. fiscal response to the pandemic was especially large, such that American consumers are creating plenty of demand in overseas markets. There’s also imported inflation. The Canadian dollar has tumbled since 2021, making it more expensive to buy goods in U.S. dollars.

What’s being done about inflation?

To tamp down inflation, the Bank of Canada raised interest rates at the most aggressive pace in several decades. Over a series of decisions, the bank raised its benchmark interest rate from 0.25 per cent in 2022 to 5 per cent on July 12, 2023. The Bank of Canada left its key interest rate unchanged at 5 per cent in March – for the fifth consecutive time since July.

After the February inflation report, investors ramped up their bets that the Bank of Canada will start to lower interest rates in the first half of the year, perhaps in April or June.

The next interest rate announcement is April 10.

Will inflation go down in 2024?

Yes, inflation will probably subside this year. Thus far, the annual inflation rate has more than halved from its peak in mid-2022. Bank of Canada Governor Tiff Macklem said inflation could near the central bank’s 2-per-cent target by the end of the year, although the BoC’s official projection is that inflation will hit that mark sometime in 2025.

Predicting inflation can be a difficult business. Central bankers around the world were slow to recognize the staying power of inflation as it picked up in 2021. Furthermore, inclement weather or geopolitical crises can drive up prices in unforeseen ways. The future path of inflation is uncertain, and getting back to 2 per cent won’t necessarily happen on the Bank of Canada’s timeline.

Latest news and updates about inflation