Canada’s inflation rate slowed to 5.2% in February. When will it return to normal?
For decades prior, inflation had been relatively steady at around 1.5% to 3% annually. Last year, however, due to the increase of money in circulation and pandemic-related supply shortages, inflation spiked to levels not seen since the early 1980s. Prices across many essential categories, especially food and housing, have become noticeably higher since early 2021, making life less affordable for most Canadians.
The Bank of Canada (BoC) delayed taking action against inflation early on, but then started to aggressively hike interest rates in March 2022. On March 8, 2023, after a year of hikes that saw the BoC’s key lending rate climb from 0.25% to 4.5%, the Bank hit pause, and it hopes to maintain the current rate for a while.
What is the inflation rate in Canada?
The Consumer Price Index (CPI), through which Canada tracks inflation, rose 5.2% year-over-year in February. That means the annual rate of inflation is now trending downward, falling from 5.9% in January, which was already much lower than the high of 8.1% in the summer of 2022. In fact, the February inflation rate represents the sharpest deceleration in the CPI since April 2020.
However, food costs continue to rise at a faster pace than overall inflation. The cost of food purchased from grocery stores was up 10.6% in February, compared to a year ago. Food inflation has been in the double digits for seven consecutive months.
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 earn $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—or between 1% and 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.