Home » Blog » A factor cooling inflation could soon end. What it means for the Bank of Canada
Business Canada Economy Featured Global News Lifestyle News World News

A factor cooling inflation could soon end. What it means for the Bank of Canada

The waning of a factor helping to push down inflation means the Bank of Canada will be relying on a pronounced slowdown in the economy this fall to keep prices from rising more, experts say.

The central bank has seen progress in cooling the headline inflation figure, but Tuesday’s inflation report from Statistics Canada marked a bump in the road as the consumer price index rose half a percentage point to 3.3 per cent in July. That’s still down substantially from highs of 8.1 per cent last summer.

But it’s in part because of that exact comparison — last year’s decades-high levels of inflation versus today’s mostly milder price hikes — that’s yielding inflation rates that appear relatively tame.

It’s a consequence of the so-called “base-year effect” — and its positive impact on inflation will shortly fall out of StatCan’s annual calculations.

“A lot of the base-year effects, in terms of pushing inflation rates lower, are in the past,” says RBC’s assistant chief economist Nathan Janzen in an interview with Global News.

One of the reasons Janzen expected inflation to tick up in July is the recent run-up in gas prices.

While Canadians might be paying a bit more at the pump as of late, prices remain largely lower than the peaks of last summer when many motorists across the country were facing down $2 per litre of regular gasoline. Those high gas prices were a major fuel for rampant inflation in the summer of 2022.

Since inflation is calculated as a comparison of prices this year from last, rising gasoline prices can still be an overall drag on this July’s headline CPI figures, Janzen explains.

“That’s not because energy prices are particularly low — oil prices are still over US$80 a barrel — it’s just that they were substantially, substantially higher than a year ago,” he says.

The base-year effect can seem a bit like an illusion when it comes to how Canadians experience inflation, says Tu Nguyen, economist at RSM Canada.

“When we compare prices this year to last year, it might look like inflation has gone down,” she says. “Whereas for families, for households and businesses, prices are still very high.”

The base-year effect can also work in reverse, making inflation seem, well, inflated, after a year of relatively low price pressures.

While in this case the base-year effect has been a boon for the Bank of Canada in bringing headline inflation back into its one-to-three per cent target range, that particular headwind will be fading heading into the fall, experts warn.

While fuel prices began to calm in the late summer months of 2022, gas prices are continuing to rise this year heading into August.

With less help from the base-year effect going forward, annual inflation could well tick up again in the months to come, Janzen says.

But Nguyen tells Global News that even as the base-year effect wanes in the fall, the Bank of Canada is expected to receive some support in its inflation fight thanks to the impact of its interest rate hikes to date.

Many economists are expecting a long-awaited slowdown in the economy this fall. That should see households cool spending demand, in turn putting less pressure on inflation.

That could offset the impact of a diminished base-year effect and help keep annual inflation in the Bank of Canada’s one-to-three per cent range, Nguyen argues.

The central bank is also not likely to respond forcefully to inflation pressures tied to the volatile energy market, Janzen notes.

Source: Global News