For the last decade Canada has enjoyed inflation that never rose over 3%, hitting the Bank of Canada’s target. There were times when inflation was so low and unalarming that economists and public figures called for massive government spending and even interest rates to stimulate economic growth and employment gains. Now, because of the financial and economic aftershocks of COVID-19, the party is over given the arrival of the latest inflation stats. May saw inflation hit 3.6%, the highest rate in a decade. This is notable because it shows that Canadian inflation is almost as high as the U.S. (3.8%), where multi-trillions have been printed and spent by governing bodies in the wake of COVID-19.
Not since the early to mid 1990s has Canadian inflation approached 4%. This inflation is the result of low interest rates and huge increases in government spending across the board, coupled with supply shortages and labour disruptions. Housing and rental costs increased by 4.2% in May, furniture and appliance costs rose almost 4.5%, and gas prices have surged by over 43% from May 2019 figures. Car prices are going up, health care prices are rising, and some food items are getting more expensive – especially meat. The overall 3.6% inflation was not unexpected, economists expected a 3.5% increase, and Tembo has been writing about the potential for higher inflation and its importance to the real estate market for years.
The big question now is will this inflation remain, will it get worse, or will it begin to dissipate? All eyes are on this. If inflation sustains itself rates will have to go up. Economists are all saying that this inflation is transitory, that it’s a temporary offshoot of COVID, and that it’s a natural bounce from the low point where prices fell in the immediate aftermath of COVID. We’re already seeing that the ‘lumber bubble’ has apparently popped, and that lumber prices will now begin to fall from serious highs – so that could back up the ‘transitory’ argument. But with restrictions lifting, and people eager to consume and spend money, demand for goods and services will only grow. There’s unpredictability out there, but let’s all hope that inflation will go away.