Inflation is slowing, but prices will not come down
The most optimistic scenarios predict that prices will continue to rise even if inflation continues to decelerate.
After hitting a 40-year high earlier this summer, inflation finally slowed in August, in Canada, to 7%. Although this is an encouraging sign, do not expect prices to come down.
Indeed, the most optimistic scenarios predict that prices will continue to rise even if inflation continues to decelerate.
It is price growth that will be slower, not prices that will fall, said Benjamin Reitzes, senior economist at BMO.
In the best case scenario, rates higher interest rates and a slower economy will bring inflation back to a more moderate pace. inflation, but Mr. Reitzes believes this should not be expected to happen with all other goods and services.
Some prices are likely to pull back, as is the case with gasoline, he said. But others have just reached a new, higher plateau and will continue to climb at a slower rate. That's slower inflation.
As high interest rates increase borrowing costs and undermine economic growth, the prices of some inflation-promoting goods and services have come down. The price of oil has fallen this year, shipping costs are almost back to pre-pandemic levels, and grain and corn prices have fallen.
On the other hand, the price of food and services continues to rise. That of food has increased by 9.8% this year, until August. The fight against inflation must therefore continue and economists expect the Bank of Canada to raise its key rate again.
Inflation hasn't slowed enough and hasn't slowed for long enough to convince the Bank of Canada that more interest rate hikes aren't necessary, said CIBC economist Andrew Grantham. /p>
Many Canadian households are struggling to keep up with rising prices for goods and services.
This means that Canadians who are already affected by rising prices will find it even more difficult to accept the increase in their monthly debt payments. There will also be an economic downturn and job losses.
The Conference Board of Canada's chief economist, Pedro Antunes, believes people have forgotten how inflation can be insidious since they hadn't experienced such an inflationary spurt in decades.
According to him, inflation devours our purchasing power. The prices of almost everything are rising, but wages are not. In fact, wages go down when you consider rising costs. The real salary, he recalls, is calculated by subtracting the salary increase from inflation.
Mr. Antunes sees the gap between wage gains and rising prices and believes it will stubbornly damage our ability to purchase goods and services.
Even if price growth slows, it will take time to bring them back to a level acceptable to the Bank of Canada.< p class="sc-v64krj-0 knjbxw">Gasoline prices have come down this year, which has helped to slow inflation.
The central bank would like inflation to rise by 1% to 3% per year. Claire Fan, an RBC economist, believes she could quickly recover to that target. That will depend on how aggressively the Bank of Canada decides to raise interest rates.
Ms Fan forecasts that inflation will not return to the target range before the end of the next year.
That's what we want, she says. That will depend on whether the Bank of Canada raises rates to 4% by December.
However, Canadians should remember that slowing inflation does not mean that prices will return to what they were before, Ms. Fan points out.
We expect a deceleration in the rate of price growth, not a decrease in prices, she says .
The alternative to rising prices could be an even worse evil. Indeed, a fall in prices would set the stage for another type of economic crisis.
Deflation occurs when all prices go down and the price index at the consumption (CPI) becomes negative. Suddenly people stop buying goods and services, the economy shrinks and there are job losses.
It puts a lot of pressure on the economy. It is extremely difficult for central banks to stimulate the economy in a deflationary environment, says Reitzes.
It's also a vicious circle that's hard to break, adds the economist based on the example of Japan.
The economic situation in Canada is not much different from what most developed countries have experienced, according to economist Pedro Antunes.
Japan has been battling deflation for decades. Various governments and central bankers have tried everything to get the country out of it.
They are doing the best they can. They tried everything possible and the government spent a lot of money [to defeat deflation], Reitzes explained.
In Canada, people don't have not faced this type of problem for decades. Across the country, people are struggling to bear the brunt of rising prices. The remedy is higher interest rates, which in the short term will further complicate the lives of indebted households.
Even if the rise in prices slows, the surge in inflation of the past year has established a new normal. A new level from which, if we are lucky, prices will continue to rise at a somewhat more manageable rate.
Based on a text by Peter Armstrong, of CBC