Inflation is falling as interest rates rise, but high prices remain a challenge for many

Inflation is finally easing in Canada after months of record high prices for food, housing, gasoline and many other basic and consumer goods.

But the cost of living crisis continues to impact the lives of Canadians and spark debates in federal politics as well as the ongoing municipal election campaign in Ottawa.

Canada’s inflation rate fell to 7% in August, down from the 40-year high of 8.1% Canadians experienced earlier this year. The decline in inflation is largely due to multiple interest rate hikes by the Bank of Canada, including a 0.75 percentage point hike announced in early September.

September inflation figures are due out on October 19, with the Bank of Canada’s next interest rate decision a week later on October 26.

Conclusion: Inflation is still high and has had negative effects on businesses and consumers.

Inflation hits consumers’ wallets

Amanda Hackett, an Ottawa resident, works for the federal government and said that due to her relatively good salary, she has never had serious financial problems due to inflation. However, she says, soaring prices over the past year have affected her lifestyle.

“The high price of gas caused by inflation affected the amount of use of my vehicle and reduced the amount of extracurricular activities I did,” Hackett said. “I’m lucky enough to work from home most of the time, so I haven’t had to buy as much gas as I otherwise would have.”

High prices have also affected the amount of gas she puts in her car when she fills up.

“When prices were at their highest, I would only fill half a tank at a time. I watch petrol prices very closely.

— Amanda Hackett, Ottawa resident, federal public servant

“When prices were at their highest, I only filled half a tank at a time. I’m watching gasoline prices very closely,” Hackett said. “Usually, I wait until the evening when gas prices drop before filling up. I checked again in the early afternoon and saw that gas prices had dropped.

She said family members live elsewhere in Canada where gasoline is significantly more expensive than in Ontario, and Hackett said they’re definitely struggling financially.

“The closest community is about an hour from where they live. So it’s really affected how much they leave their community for gas or medical appointments or other essentials,” Hackett said.

While gas prices have seen a slight decline, grocery prices have risen 10.8% over the past year, the fastest increase in more than four decades.

Gas prices have come down somewhat, from over $2 a liter in the summer, but remain relatively high at stations around Ottawa, such as Drummond’s Gas in Manotick. [Photo © Adamo Marinelli]

A price comparison of various consumer price index items from a year earlier shows how severe inflation has been in 2022.

“It limits the money I have for groceries,” Hacket said. “I don’t buy fresh produce as much and cook different meals that are more financially feasible.”

What are the causes of inflation and what are the potential solutions?

Renaldo Saikali of Kanata is a Scotia Wealth Management financial investor and owns his own portfolio management company called Saikali Portfolio Management through Scotia McLeod.

Saikali said that inflation, which is a sharp rise in prices, occurs when there is an imbalance in the balance of supply and demand.

“When you have a level of supply that is reduced for some reason, for example, COVID-19, and the demand increases, you get a price spike,” Saikali said. The pandemic and Russia’s invasion of Ukraine have been widely cited as major factors disrupting global supply chains and triggering a spike in inflation around the world over the past year.

“COVID-19 shut down supply chains around the world and caused the initial spike in inflation.”

— Renaldo Saikali, financial investor, Scotia Wealth Management

Saikali said there are two ways to help correct the imbalance.

“Either you increase the supply of a particular good or service, which a central bank cannot do, or you can temper demand, which a central bank can do by raising interest rates. interest,” Saikali said.

However, raising rates to cool demand opens up new problems, including lower discretionary income and higher unemployment rates, which can lead to a recession.

Saikali said there aren’t many benefits that come from raising interest rates, but he recognizes the need to raise them to stifle inflation.

Why have inflation rates skyrocketed over the past two years?

The increase in inflation was caused by various internal and external factors.

“COVID-19 shut down supply chains around the world and caused the initial spike in inflation. Every country had the same response to print money to help people survive, which had to be done,” Saikali said.

No matter which government was in power, we would have seen a spike in inflation due to the pandemic, Saikali said.

Pierre Poilievre, the new federal Conservative leader, has blame Justin Trudeau’s Liberal government for the rapid increase in inflation, claiming that its continued overprinting of money is responsible for high gas and grocery prices and making life harder for Canadians.

Bank of Canada Deputy Governor Paul Beaudry acknowledged that governments and central banks “should have withdrawn (COVID-19) stimulus earlier…which likely (would have) limited inflation “, he said in a recent speech at the University of Waterloo.

Trudeau responded to Poilievre’s criticisms by saying that his government would not stop calling out “questionable and reckless economic ideas”, referring to Poilievre’s promotion of volatile cryptocurrencies as a way for Canadians to “remove the inflation”.

Meanwhile, candidates from across Ottawa vying for seats in the Oct. 24 municipal election have highlighted the high cost of housing and other affordability issues as priorities for the new city council to address.

High inflation has made it difficult for businesses such as restaurants, which have paid more for food due to supply shortages, to maintain profits. They also faced huge revenue losses as fewer customers ate at the restaurant during the COVID-19 crisis and due to rising prices. Meanwhile, labor shortages mean restaurants have also struggled to maintain staff.

One of the owners of Pizza All’Antica, a small, family-run Italian restaurant in Manotick, said the main challenge was to produce more expensive inputs and find enough staff to work each day given the labor shortage. work.

Pizza All’Antica, a family business in Manotick, struggled to stay afloat and find workers during times of high inflation. [Photo © Adamo Marinelli]

“While nominal sales are expected to return to pre-pandemic levels before the end of the year, traffic still remains lower than before,” said Christian Buhagiar, President and CEO of Restaurants. Canada, in a September 15 press release. “Restaurant owners are struggling financially, with half of our operators operating at a loss or just breaking even.”

Leslie M. Gill