When will there be a substantial drop in inflation?

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à when a drop substantial inflation?

For several months, the inflation rate has been hovering around 7%. Many are now wondering what it will take to see a real drop in consumer prices.

Despite falling gas prices, inflation remains high in Canada.

Those hoping for a lull on the inflation front will have to wait. We will have to wait several months before returning to a normal situation and probably go through a good old recession, even a limited one, to get there. Nothing is more effective than this bitter remedy to calm the rise in prices.

Inflation has now been hovering around 7% for four months and, so far, the rising interest rates had no effect on it, which discouraged many households, especially those with low incomes.

Several reasons can explain this stagnation. First of all, it is sometimes necessary to wait more than a year and a half before seeing the effects of the policies of the Bank of Canada on the economy.

Second, and even though energy prices have fallen, supply chains remain fragile, there is excess demand and the list goes on, as several other factors also impact inflation.

There is the weakness of the Canadian dollar, for example. In winter, there is a package of goods that are imported from the South. All of this can also play into the balance, assured the economist and senator Clément Gignac in an interview with Radio-Canada.

Clément Gignac, economist and senator

Employees have also lost a lot of their purchasing power in recent months and naturally want better salary conditions. However, with the labor shortage, employers have had no choice but to raise wages, especially in the service sector, which also has an effect.

“I say it often: even if wages are not the cause of the surge in inflation, they are certainly one of the causes that explain why it takes a long time to decelerate. »

— Clément Gignac, economist

Inflation in the food sector also remains high (+11.4% over one year), which brings its share of questions. For example, where does the money go?

We know that input costs went up for a while, but now the price of grain has gone down [and] we don't really see the impact on prices. There are players in the food chain who are going after too much, believes economist Daniel Denis.

And he fears that if food inflation remains, it will not ;aggravates social inequalities and causes political instability in some countries, which will ultimately have an impact on the global economy.

This can create social tensions, especially in developing countries. There could be a snowball effect on the economy, he analyzes.

With all these factors, it is therefore difficult to decide on the exact moment of a substantial drop in prices. On this issue that affects us all, economists agree, however, that we will have to be patient. It could be done in a few steps.

First echelon: March 2023. This time last year, if we remember correctly, the war in Ukraine was beginning. Very quickly, the prices of oil and several raw materials had increased. A year later, we will therefore be able to assess the path that remains to be covered to return to normal.

The effect of the war in Ukraine will begin to disappear in next March. At that point, we will therefore have a better reading of what we will have left of inflation, believes Jean-René Ouellet, investment strategist and portfolio manager at Desjardins.

Beyond this important milestone and despite monthly variations, inflation should still accompany us for several more months and the decline will take place gradually.

Starting from 8% and going to 5 .5% or 5%, that end, in quotes, it's no longer easy. But there, going from 5% and going to 2%, it will be more painful, believes Mr. Gignac.

This first plateau, that of 5%, should be reached within six months, according to him. This is also the opinion of economist Daniel Denis.

I think central banks will have a hard time reaching their target, the 1% to 3% range at the end of 2023, beginning of 2024. I think we're going to have a period with a little higher inflation rate from service sector and labor market pressures, he said.

During 2023, inflation is therefore expected to move outside of the range desired by the Bank of Canada.

We may have a period of 3% to 4% rates for a little longer than what is claimed by central banks, he says.

Economists are all agree on one point: inflation could be subdued more quickly if there is a recession, probably the lesser of the two evils.

The recession affects a certain category of people temporarily, while inflation affects everyone, and it hits the less well off even more. […] Of course, it will be difficult to quickly return to 2% inflation without going through this: it's like making an omelette without breaking eggs, believes Mr. Gignac.

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Jean-René Ouellet, investment strategist and portfolio manager at Desjardins

What will it take to break inflation? A recession, abounds Jean-René Ouellet. It becomes like a tool. […] Strangely, we will celebrate it, because the recession, eventually, will lower interest rates: people who had variable rate mortgages will have a breath of fresh air. Until we break inflation, rates will stay tight.

For him, it is crucial that the number of vacancies decreases. The current context of rising wages is fueling the inflationary spiral. With an economic slowdown or recession, we could even see the first layoffs in certain sectors.

When real estate developers have completed their existing order books, I have the impression that we are going to start seeing people being fired. But the good news is that there is good demand in other niches, says Ouellet.

In Quebec, there are ten positions posted for every six people who are not working. So, even if we lose job postings… From an economic point of view, job postings do not earn money, it does not support a family, he continues.

This is also what Clément Gignac believes. Over the next few months, keep an eye out for We're Hiring signs on the front of businesses. They may disappear in certain slots.

If orders are not there, companies will have no choice but to start making layoffs. We see it with companies in Silicon Valley and with the decline in advertising spending by advertisers. It's the number one discretionary item: when it slows down, you cut spending on advertising, he says.

Meanwhile, other industries that had been booming for the pandemic – by adjusting their prices accordingly – will return to normal, to the benefit of consumers.

There are products that are little affected by the rise in rates, in particular essential goods and products that are not obtained by borrowing. But at car dealerships, we will most certainly see promotions with preferential interest rates, thinks Daniel Denis.

There are sensitive sectors that are not slowing down: they brake suddenly! I have a snowmobile retailer who told me they have order cancellations every day. Customers say, “Keep my $500 deposit and I won't take the sled.” There are clear signs of deceleration, notes Mr. Ouellet.

Jean-René Ouellet recalls that according to a recent survey, the percentage of Quebecers who believe that this is 'a good time to make a major purchase is at its lowest… since 2007. There are people who are shaking, he concludes.

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