OTTAWA – Members of Parliament (MPs) returned to the House of Commons to address the ongoing issue of inflation, which is currently influenced by a new array of factors. Consumers are still grappling with soaring inflation levels seen during the post-pandemic recovery, particularly in key areas such as housing, fuel, and groceries.
Currently, the dynamics driving inflation in Canada differ significantly from those observed following the lifting of lockdowns. Both MPs and the Bank of Canada are now evaluating the effects of tariffs, taxes, and government spending on the overall cost of living.
Current Inflation Status
According to Statistics Canada, the annual inflation rate was recorded at 1.9% in August, an increase from 1.7% the previous month. The Bank of Canada aims to maintain price stability with a target inflation rate of 2% per annum. Mostafa Askari, chief economist at the Institute of Fiscal Studies and Democracy and the University of Ottawa, noted that while the slight increase in the inflation rate is visible, it is not a cause for alarm. He advises policymakers to consider inflation trends over several months rather than reacting to short-term fluctuations.
Driving Forces Behind Inflation
Randall Bartlett, deputy chief economist at Desjardins, highlighted that one significant factor contributing to the easing of inflation is the cancellation of the consumer carbon price. The elimination of this levy, which was set to take effect for consumers in 2024, has led to lower gas prices in recent months, impacting year-over-year comparisons for inflation data.
Additionally, shelter inflation is subsiding as population growth slows, resulting in lower demand for apartments and consequently decreasing rental rates in various cities. Mortgage rates for new loans have also adjusted, with current rates hovering around 4% for a five-year fixed loan, a notable decrease from the rates exceeding 5% observed at the same time last year.
Food inflation, however, remains an area of concern, with Statistics Canada reporting it at 3.4% in August—still significantly lower than the double-digit increases seen during previous high-inflation periods. Askari explained that consumers continue to feel the long-term effects of rising prices, particularly in grocery stores, where price increases tend to be rapid but slow to decline.
Impact of Counter Tariffs
The retaliatory tariffs imposed by Canada against the United States have also played a role in grocery inflation. These tariffs, levied on Canadian companies importing U.S. goods, affect the final prices of manufactured products, and some of these costs are reflected in perishable goods, including Florida orange juice. Askari noted that while it is challenging to quantify the exact impact of these tariffs on prices, their effects are evident.
In a positive development, Canada lifted most of its retaliatory tariffs on the U.S. at the beginning of the month. Bartlett anticipates that, combined with the termination of the consumer carbon price, the removal of these tariffs will reduce headline inflation by approximately one percentage point by 2026.
Government Spending and Inflation
Conservative Leader Pierre Poilievre has criticized the federal government for its budget deficits, claiming they exacerbate inflation. However, the relationship between government spending and inflation is complex. Askari argues that when government spending enhances consumer and business income, it increases overall demand, potentially pushing prices higher. Conversely, spending aimed at increasing supply, such as housing projects, can alleviate inflationary pressures.
The Canadian economy contracted in the second quarter, with many economists forecasting a modest recovery beginning in the third quarter. Bartlett explained that this indicates an economy operating below its full potential, suggesting that targeted fiscal stimulus could strengthen the economy without causing significant inflation spikes.
Nonetheless, he cautioned that the anticipated size of the Liberal government's upcoming deficit may be excessive considering the current economic climate. Ottawa's planned capital expenditures could induce inflationary pressures in the short term due to rising demands for construction labor and materials but could lead to long-term productivity gains, thereby easing inflation down the road.
Interest Rate Outlook
The Bank of Canada has been closely monitoring inflation trends, particularly in light of uncertainties surrounding U.S. tariffs. Recently, officials reduced the benchmark interest rate by 25 basis points to 2.5%, signaling a shift in focus toward a weakening economy rather than a rising inflation threat. Askari noted that this decision implies that the Bank does not currently foresee heightened inflation risks.
The Bank of Canada has not incorporated recent government spending announcements into its inflation forecasts, as those details will be included after the federal budget is released on November 4—shortly after the Bank's next interest rate announcement.
