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Inflation is the general increase in the prices of goods and services over time. It affects the purchasing power of money and the cost of living. The main measure of inflation in Canada is the Consumer Price Index (CPI), which tracks the changes in the prices of a basket of goods and services that represent the average consumption of Canadian households.

According to Statistics Canada⁴, the annual inflation rate in Canada declined to 3.8% in September 2023 from 4% in August, below market expectations of 4%. The result further strengthened expectations that the Bank of Canada will refrain from further rate hikes in the current cycle, although policymakers heeded the risks of early cuts⁴. Inflation fell for food and beverages, largely due to softer price growth for groceries, and for durable goods, amid lower inflation for new passenger vehicles and deflation for furniture and household appliances⁴. On the other hand, the sharp increase in crude oil prices over the period drove transportation costs to accelerate, as the surge in gasoline prices offset the decline in airfare costs⁴.

The main factors that contributed to the high inflation rate in Canada in 2023 were:

• The global supply chain disruptions caused by the COVID-19 pandemic, which affected the availability and prices of many goods, especially imported ones⁵.
• The strong demand for housing and construction materials, which pushed up the costs of shelter and rent⁵.
• The depreciation of the Canadian dollar against the US dollar, which made imports more expensive⁵.
• The base effects of comparing current prices with lower prices a year ago, when the pandemic had a deflationary impact on some sectors⁵.

The future prospects for inflation in Canada depend on various factors, such as:

• The evolution of the pandemic and its impact on economic activity, consumer confidence, and global trade⁶.
• The monetary policy stance of the Bank of Canada, which influences the interest rates, exchange rates, and money supply⁶.
• The fiscal policy actions of the federal and provincial governments, which affect the aggregate demand, public debt, and tax revenues⁶.
• The demographic trends and immigration levels, which shape the labour force growth, productivity, and potential output⁶.
• The technological innovations and structural changes, which create new opportunities and challenges for various sectors and markets⁶.

According to The Conference Board of Canada², inflation is expected to moderate gradually over the next few years, as some of the temporary factors fade away and supply conditions improve. However, inflation will remain above the Bank of Canada’s target range of 1% to 3% until 2025, reflecting persistent demand pressures and cost pressures. The Bank of Canada is projected to raise its policy rate gradually from 5% in 2023 to 6.25% by 2025, to keep inflation under control and support economic growth².

The long-term outlook for inflation in Canada is influenced by the aging of Canada’s population, which will lead to a slowdown in labour force growth and potential output growth. This will limit the economy’s ability to meet rising demand without generating inflationary pressures. However, immigration can help offset some of the negative effects of population aging by increasing the labour supply and boosting productivity. Moreover, technological innovations can enhance efficiency and competitiveness, lowering production costs and increasing output capacity².

The Conference Board of Canada forecasts that inflation will average 2.1% annually over the long term (2026-2045), slightly above the Bank of Canada’s midpoint target of 2%. This reflects a balanced scenario that assumes moderate global growth, stable commodity prices, sound fiscal management, prudent monetary policy, robust immigration inflows, and steady technological progress².

Source:
(1) Canadian Rate Hikes Unlikely As Inflation & The Economy Slows. https://betterdwelling.com/canadian-rate-hikes-unlikely-as-inflation-the-economy-slows/.
(2) Bank of Canada maintains policy rate amidst global economic challenges. https://www.zeebiz.com/personal-finance/banking/news-bank-of-canada-maintains-policy-rate-amidst-global-economic-challenges-261369.
(3) Canadian firms see inflation easing somewhat amid flagging demand. https://ca.investing.com/news/economy/canadian-firms-see-inflation-easing-somewhat-amid-flagging-demand-3138981.
(4) Canada’s Outlook to 2045 – The Conference Board of Canada. https://www.conferenceboard.ca/focus-areas/canadian-economics/canadian-long-term-outlook/.
(5) Canada in 2050: a bigger and better economy? – University of Toronto …. https://www.utm.utoronto.ca/main-news/canada-2050-bigger-and-better-economy.
(6) Economic Overview | Budget 2023. https://www.budget.canada.ca/2023/report-rapport/overview-apercu-en.html.
(7) Canada Inflation Rate – September 2023 Data – 1915-2022 Historical …. https://tradingeconomics.com/canada/inflation-cpi.
(8) A snapshot of how inflation is affecting Canadians. https://www.statcan.gc.ca/o1/en/plus/3096-snapshot-how-inflation-affecting-canadians.
(9) Canada’s inflation rate hits a fresh 18-year high – BBC News. https://www.bbc.com/news/business-58986399.