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Inflation Rate and CPI in Canada Today

Inflation Rate and CPI in Canada Today

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    The inflation rate is the rate of increase in the price of goods and services in the Canadian economy over time. Inflation is measured using the Consumer Price Index (CPI), which measures the price movements of a basket of goods and services over time.

    The Bank of Canada uses CPI readings to monitor how monetary policy measures affect the economy, adjusting the policy interest rate to bring inflation within the target range.


    Key Takeaways

    • Inflation measures the pace at which goods and services increase in costs year-over-year. 
    • When the Bank of Canada makes monetary policy decisions, it monitors CPI-trim, CPI-median, and CPI-common rather than core inflation measures.
    • Inflation is typically driven by supply and demand in the economy.

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    Current Inflation Rate in Canada: 2.7%

    Inflation in June fell to 2.7% from 2.9% in May. This month’s deceleration is attributed to slower year-over-year gasoline price growth. Shelter costs are the largest drivers of inflation, down 6.2% in June from 6.4% in May.

    The measures of core inflation that the Bank of Canada monitors and uses as the basis for monetary policy decisions remain at 2.9% for CPI-trim and CPI-median fell to 2.6%.  

    Inflation by CPI Category June 2024

    CPI Category CPI
    Food 2.8%
    Shelter 6.2%
    Household Operations, Furnishings and Equipment -0.9%
    Clothing and Footwear -3.1%
    Transport 2.0%
    Health and Personal Care 3.0%
    Recreation, Education and Reading 0.6%
    Alcoholic Beverages, Tobacco Products, and Recreational Cannabis 3.1%

    Inflation Rates by Province June 2024

    Province Inflation Rate
    Newfoundland and Labrador 2.3%
    Prince Edward Island 3.4%
    Nova Scotia 3.5%
    New Brunswick 2.8%
    Quebec 2.2%
    Ontario 3.0%
    Manitoba 1.4%
    Saskatchewan 1.4%
    Alberta 3.0%
    British Columbia 2.6%

    What Is Inflation and How Is It Measured

    Inflation measures how much goods and services have increased in cost over time. Inflation reduces purchasing power over time, and as inflation increases, your dollar no longer goes as far as it used to. 

    Inflation is measured using the Consumer Price Index (CPI), which measures price movements by comparing retail prices of a basket of goods and services over time. CPI is divided into 8 major categories, each weighted and assigned a share according to the importance of the good or service based on consumer spending habits. Basket weights are typically updated on an annual basis. 

    CPI Basket Weights (2023)

    Category CPI Basket Weight
    Food 16.72%
    Shelter 28.57%
    Household Operations, Furnishings and Equipment 13.46%
    Clothing and Footwear 4.70%
    Transportation 16.78%
    Health and Personal Care 5.18%
    Recreation, Education, and Reading 10.42%
    Alcoholic Beverages, Tobacco Products and Recreational Cannabis 4.17%
    Data from Stats Can

    CPI is calculated based on the percentage change over a 12-month period and is a key indicator of inflationary pressures in the Canadian economy. CPI data is measured in each province and territory and weighted according to the importance of that province to consumer spending in Canada. 

    CPI Basket Weights by Province (2023)

    Geography Weight
    Canada 100%
    Newfoundland and Labrador 1.30%
    Prince Edward Island 0.38%
    Nova Scotia 2.47%
    New Brunswick 1.87%
    Quebec 20.34%
    Ontario 40.80%
    Manitoba 3.15%
    Saskatchewan 2.80%
    Alberta 11.74%
    British Columbia 14.99%
    Whitehorse, Yukon 0.07%
    Yellowknife, Northwest Territories 0.07%
    Iqaluit, Nunavut 0.02%
    Data from Stats Can 

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    The Bank of Canada’s Preferred Measures of Core Inflation

    The Bank of Canada monitors 3 measures of core inflation and uses these readings as the basis for monetary policy decisions. 

    CPI-trim

    This measurement excludes CPI components with extreme price movements in a given month. This measure reduces the impact of volatile changes due to conditions that only impact a specific component. For example, extreme drought affecting crop prices could artificially inflate the food component in a given month. CPI-trim removes 40% of the total CPI basket, calculated by removing the highest and lowest 20% of weighted monthly price variations.

    CPI-median

    This measurement also filters out volatile price movements for components similar to CPI-trim. However, this measurement uses the middle point or median price change out of the range for a component. 

    CPI-common

    This measurement follows price changes that are common across basket categories. A statistical model called the factor model detects common variations, filtering out price movements specific to a component. 

    Historical Inflation Rates in Canada

    The table below provides a 10-year historical overview of Canadian inflation rates from January 2014 to the present day. 

    Source: Bank of Canada

    Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
    2014 1.5% 1.1% 1.5% 2.0% 2.3% 2.4% 2.1% 2.1% 2.0% 2.4% 2.0% 1.5%
    2015 1.0% 1.0% 1.2% 0.8% 0.9% 1.0% 1.3% 1.3% 1.0% 1.0% 1.4% 1.6%
    2016 2.0% 1.4% 1.3% 1.7% 1.5% 1.5% 1.3% 1.1% 1.3% 1.5% 1.2% 1.5%
    2017 2.1% 2.0% 1.6% 1.6% 1.3% 1.0% 1.2% 1.4% 1.6% 1.4% 2.1% 1.9%
    2018 1.7% 2.2% 2.3% 2.2% 2.2% 2.5% 3.0% 2.8% 2.2% 2.4% 1.7% 2.0%
    2019 1.4% 1.5% 1.9% 2.0% 2.4% 2.0% 2.0% 1.9% 1.9% 1.9% 2.2% 2.2%
    2020 2.4% 2.2% 0.9% -0.2% -0.4% 0.7% 0.1% 0.1% 0.5% 0.7% 1.0% 0.7%
    2021 1.0% 1.1% 2.2% 3.4% 3.6% 3.1% 3.7% 4.1% 4.4% 4.7% 4.7% 4.8%
    2022 5.1% 5.7% 6.7% 6.8% 7.7% 8.1% 7.6% 7.0% 6.9% 6.9% 6.8% 6.3%
    2023 5.9% 5.2% 4.3% 4.4% 3.4% 2.8% 3.3% 4.0% 3.8% 3.1% 3.1% 3.4%
    2024 2.9% 2.8% 2.9% 2.7% 2.9% 2.7%

    What Drives Inflation?

    Supply and demand in the economy are typically the key drivers of inflation. Demand for products or services can sometimes be greater than the supply available. When this happens, prices are increased to close the gap. This is known as demand-pull inflation, which occurred in the economy recently when businesses laid off employees during the pandemic and then struggled with labour shortages, unable to meet increased demand. 

    Higher prices due to higher production costs can cause prices to increase. This is known as cost-push inflation, which occurred most recently with lumber prices. Businesses that rely on lumber to produce products were impacted by shortages and higher costs, increasing their business costs. These additional costs are passed on to consumers through price increases so that companies can maintain or increase profit margins. 

    When inflation remains high, and expectations are that it will remain high, workers may ask for wage increases to afford the higher cost of living. This is known as built-in inflation, which occurs when companies increase the prices of their products or services to compensate for wage increases to maintain profit margins. This creates a loop or a wage-price spiral. As prices rise, workers demand higher wages to keep up with inflation and the high cost of living, contributing further to inflation. 

    How to Calculate Inflation Rate

    To calculate the inflation rate, you need to know the current price of the good or service and the cost of that good or service in the year you wish to calculate the rate. 

    Inflation Rate = (Current CPI – Previous CPI) / Previous CPI x 100

    This can be applied to the real world for any price of goods or services as long as you know the previous price. For example, if you want to calculate the inflation rate for a pound of cherries compared to last year, you can use the formula above to determine the inflation rate. If cherries were $6.99 a pound in June 2023 and 8.99 a pound in June 2024, you can calculate the inflation rate as follows:

    Inflation Rate = (8.99 – 6.99) / 6.99 x 100 

    Inflation Rate = 28.61%

    Who Benefits From Inflation?

    Corporations that can raise prices and profit from these inflated prices tend to benefit the most from inflation. Specifically, industries like real estate and supermarkets benefit most when inflation is high. Once prices are raised due to inflation, they don’t fall to previous prices as the increases are broad, not just a one-time spike, like if droughts affect lettuce crops. Instead, they stagnate and remain the same or rise much slower once inflation has been tamed. 

    Who Does Inflation Hurt?

    Inflation harms consumers, specifically those with low or fixed incomes, as inflation erodes purchasing power. When earnings remain the same while the cost of everything increases, your money no longer goes as far as it used to. Those with lower incomes or fixed budgets typically spend a significant percentage of their income on things like rent and food, which are hard to go without when prices increase. To adjust, they must sacrifice other spending, affecting their living standards. 

    Frequently Asked Questions

    How does inflation impact consumers?

    Inflation erodes purchasing power, meaning consumers must spend more to afford the same amount of a good or service they used to spend less on. This impacts those with lower incomes or fixed budgets as more of their income will need to be spent as prices increase, lowering their standard of living.

    What is disinflation?

    Disinflation occurs when the pace of price increases slows. This means prices are still rising but much slower than before. Canada is currently in a disinflationary period as inflation comes back down and price growth for goods and services moderates.

    What is deflation?

    Deflation is the opposite of inflation and occurs when prices fall rapidly. While this may sound good to those struggling to afford inflated prices, rapidly falling prices can mean businesses see lower profits as consumers become reluctant to spend money as they wait for prices to fall further. If falling prices are prolonged, this can lead to job losses and wage cuts affecting the entire economy. 

    Deflation can be a warning signal that a recession is coming or occurring. An example of prolonged deflation occurred in Canada during the Great Depression, when prices fell significantly, leading to a skyrocketing unemployment rate.

    What are negative real interest rates?

    Real interest rates have been adjusted to remove inflation. This can be calculated as the interest rate minus the headline inflation rate. This calculation more accurately reflects the actual cost of funds for borrowers and the real yield for lenders or investors. 

    For example, if you have a Canadian bond with a return of 4% and inflation is currently 2.9%, your real rate of return is 1.1%. A negative real interest rate results from inflation outpacing the interest rate. For example, your Canadian bond with a 4% return when inflation is currently 5% would mean a negative real rate of return of 1%. 

    A negative real interest rate occurs in the Canadian economy when the policy rate is lower than inflation. In March 2022, the policy rate was 0.5%, and inflation was 6.7%, resulting in a negative real interest rate of 6.2%.

    Final Thoughts

    The inflation rate in Canada, as measured by the Consumer Price Index (CPI), is an important economic indicator currently standing at 2.7%. The Bank of Canada monitors different CPI metrics to guide its monetary policy decisions and strives to maintain inflation within a target range, which has implications for the overall economy and interest rates. It is crucial to comprehend these metrics to make well-informed financial choices.

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