Canada, alongside many other countries, has seen the effects of rampant inflation. As a result, many central banks are preparing for a possible recession in the coming months. Inflation, while it can vary from the direct source, primarily comes from the rise of costs associated with consumer goods and services. Energy prices, which were once negative, recently reached a staggering $120 USD per barrel, contributing significantly to inflation at gas stations in multiple countries.
Similar to other countries, Canada has followed closely behind the United States in terms of Inflation. Just recently, the United States reached an 8.6% inflation rate as consumer-oriented items pushed the Consumer Price Index (CPI) higher. The United Kingdom also experienced inflation of 9.1% in May, far higher than Canada’s inflation rate, but that gap is quickly closing in.
Current Inflation
In April, Canada’s inflation rate hit a 31-year high of 6.8%. Inflation has continued to remain elevated according to May’s CPI results of 7.7%, now pushing towards a nearly 40-year high. Rampant inflation is continuing to be primarily caused by food, shelter, energy, and commodities prices, at least those that are consumer-oriented. It doesn’t seem to be slowing down anytime soon either. Supply chain issues and other macroeconomic factors are forcing businesses to raise their prices to combat rising costs that consume their earnings.
Alongside record-high oil and gas prices, the invasion of Ukraine disrupted global supply chains that provided basic necessities, one of which is fertilizer, that can exponentially increase the costs of food production across Canada. This indirectly contributes to CPI through grocery prices and further squeezes the pockets of Canadians.
As a result, spending from consumers could decrease on non-essential goods and services. This is what led the TSX and S&P 500 indexes to experience sharp declines since the start of this year, particularly stemming from stocks that had high expectations fused into the stock price.
How to Slow Inflation
Slowing inflation is going to be a difficult task for the Bank of Canada, but it’s certainly possible. For starters, the policy interest rate now stands at 1.50%. In comparison, the policy rate was only 0.25% in January of this year. Canadians have seen two consecutive 50 basis point increases in just two months with possibly more to come if inflation continues to worsen. These actions could cool down the economy in preparation for a possible recession.
Another effective solution to dismantling inflation is easing supply chain restraints and shortages. Unfortunately, a majority of these critical supply chains reside overseas, making it nearly impossible to drive a substantial difference. As a result, Canada has limited options. Interest rates can only go so far, and supply chains are certainly a major factor in the inflation we all see today.
Conclusion
Everyday consumers, investors, and business owners are all asking the same question in regards to inflation, when will it ever cool down?
The answer remains relatively unknown. Although, rising interest rates are going to hamper inflation over time and likely return purchasing power to the pockets of Canadians over the next few years if operations go according to plan.
