If you’re wondering what inflation will be like in 2022, economists have a go-to answer: it really depends on just how the Omicron wave of COVID-19 evolves.
“We’re pretty comfortable with the notion that if we can get the global supply chain unglued … inflation will come down over time from where it is now,” says Avery Shenfeld, chief economist at CIBC.
“The problem is, unless you have a crystal ball on COVID and know when we’re going to have enough of the world’s population vaccinated so we don’t keep getting these disruptions to manufacturing and shipping around the world, it’s very difficult to predict how long that’s going to take,” he adds.
Canada’s inflation rate held steady at 4.7 per cent in November, matching the reading from October, which was the highest since February 2003, Statistics Canada said on Dec. 15.
Bank of Canada governor Tiff Macklem has called the current bout of rapidly rising prices “transitory but not short-lived.” The central bank has attributed inflation to worldwide supply snarls that are pushing up the prices of anything from food to new vehicles, a rebound in the price of some goods that had become cheaper in the earlier stages of the pandemic, and soaring energy costs.
The federal government’s fall fiscal update, which Deputy Prime Minister and Finance Minister Chrystia Freeland tabled on Dec. 14, warns the rapid spread of the Omicron variant “clouds” the outlook for inflation.
“The path forward will depend on a number of tailwinds and headwinds, which could either bolster the recovery or push it off course. Of concern, the global health situation has deteriorated in recent weeks, with resurgences of COVID-19 in some regions and the emergence of a new variant, Omicron,” the update reads.
Rising case counts tied to the new variant could further complicate global supply chain challenges but also slowed energy demand, temporarily dampening energy prices, economists told Global News.
Inflation likely to remain elevated next year
Another spike in COVID-19 cases could throw a wrench in the process of getting factory production and global shipping capacity back to normal, Shenfeld says.
Still, some of the factors that drove up prices in 2021 might “ebb somewhat” in 2022, says Doug Porter, chief economist at BMO.
Auto prices, for example, are unlikely to rise as much as they did this year amid the global chips shortage, he says. And Canada’s home prices are also unlikely to replicate the gravity-defying climb of 2021, he adds.
In a report released on Dec. 15, Royal LePage said it expects the aggregate price of a home in Canada to rise 10.5 per cent year-over-year in 2022. While significant, that price gain would be smaller than the year-over-year increases recorded throughout 2021.
In November, for example, Canada’s average home sale price was $720,850, up nearly 20 per cent from the same month last year, according to the latest available data from the Canadian Real Estate Association.
Still, food inflation may yet get worse before it gets better due to the global supply chain logjams, high energy prices and extreme weather events that have curtailed crop yields.
Food prices are expected to rise between five and seven per cent in 2022, the steepest increase yet forecasted by Canada’s Food Price Report, which has been estimating food inflation for the past 12 years. Restaurant meals, dairy, vegetable and bakery prices will deliver the biggest hit to Canadians’ bottom lines, with the average family of four expected to spend an additional $1,000 a year on groceries over the next 12 months.
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Overall, BMO expects inflation to average around 3.5 per cent in 2022, much higher than what Canadians have become accustomed to over the past 20 years, but lower than the rate seen over the past few months.
Omicron could temporarily result in lower gas prices
The spread of Omicron could temporarily lower prices at the pump by once again depressing global demand for travel and delaying the return to the office for commuters around the world, says Rory Johnston, founder of the Commodity Context newsletter.
Oil prices dropped to around US$73 ($94) a barrel on Tuesday after the International Energy Agency predicted Omicron would dent global demand recovery.
But any dip in gas prices would likely be short-lived, Johnston adds.
OPEC+, which includes members of the Organization of the Petroleum Exporting Countries and other producers like Russia, plans to boost supply every month by 400,000 barrels per day after sharply cutting output last year.
On the other hand, U.S. oil production likely won’t increase as much as it has done in the past in response to previous increases in oil prices, Johnston says.
U.S. oil producers seem keen to reward stockholders with share buybacks and dividend increases rather than spending cash to invest and boost output, he adds.
While motorists may see a bit of a reprieve in the first three months of the year, Johnston says gasoline prices are likely to climb back up later on in the year, making for an expensive driving season in 2022.
Interest rate still likely in the spring
Despite the economic uncertainty tied to Omicron, economists still expect the Bank of Canada to go ahead with interest rate hikes starting in the spring of 2022.
Higher interest rates make it more expensive to borrow, cooling down economic activity and putting downward pressure on inflation.
“We still think that the Bank of Canada can start raising interest rates in the spring,” Shenfeld says.
Still, Canada’s central bank can “afford to take it slowly,” he adds. Interest rates will likely climb by less than a percentage point in 2022, with a few further hikes expected in 2023, according to Shenfeld.
Higher rates would likely dampen inflation quickly, Porter says.
“It might take 18 months (for a rate hike) to fully work its way through the system, but I suspect that rate increases could be having a real effect within six months.”
— with files from Reuters