Inflation has ‘squeezed’ Canadian wallets dry. What happened?

Over the next six weeks, as part of the ‘Out of Pocket’ series, Global News will examine how inflation is impacting Canadians from coast to coast.

It’s at the grocery store. It’s at the gas pumps. It’s at your favourite restaurant.

Nearly everywhere Canadians have gone in the past year, every bill might as well have had an extra charge tacked on to the bottom reading simply: inflation.

A shorthand for what’s essentially the rising cost of living, inflation swept across the globe in 2022 and Canada was not immune from its sting.

Canadians eager to travel in June after years of COVID-19 restrictions were met by a 49.7 per cent year-over-year hike in the cost of accommodations. The rest of that summer saw the average price for regular gasoline soar past $2 per litre in many parts of the country. And in October, Canadians were paying 44.8 per cent more for pasta from the grocery store than the same month a year earlier.

Poll after poll showed how stretched Canadian dollars had become amid 40-year highs in inflation, with many forced to make impossible decisions about how to feed their families, pay for medications and keep a roof over their heads.

More than a third (36 per cent) of Canadians say their financial situations are very bad or somewhat bad heading into 2023, according to Ipsos Public Affairs polling conducted exclusively for Global News between Dec. 14 and 16.

The Liberal government, as well as opposition MPs, have seized on these pain points for Canadians this year, levelling accusations for the pain at corporate greed, overzealous spending and Vladimir Putin for Russia’s unprovoked invasion of Ukraine and resultant global supply chain kinks.

Inflation, in many respects, became the word of the year in 2022 as economists, politicians and everyday Canadians struggled to come to grips with the surging costs of everything.

So, what happened? Global News spoke to economists about how inflation got so out of hand, and in the weeks to come, will be going across the country to hear from Canadians directly about how much consumers are out of pocket amid the rising cost of living.

The annual rate of inflation — how much more you were paying for goods this year compared with last — topped out at a 41-year high of 8.1 per cent in June 2022, according to Statistics Canada’s Consumer Price Index (CPI).

It’s cooled slightly since then but has remained elevated, clocking in at 6.8 per cent in November.

A little inflation is normal for the economy in most years, but 2022’s price pressures were well above the Bank of Canada’s mandated two per cent target for inflation.

The Bank of Canada, the independent lead of monetary policy in the country, aims to keep inflation within its target primarily by using interest rates, which it has raised at a historic pace in the past year to tamp down on price pressures.

Stephen Brown, senior Canada economist at Capital Economics, says central banks worldwide, including the Bank of Canada, “clearly” acted too late last year to start raising their interest rates to lessen spending demand in the economy by making borrowing more expensive.

“I think it’s very hard to understate how high inflation was this (past) year,” Brown says.

Looking back, Brown says the consensus of economists’ predictions for the average of inflation heading into 2022 was around 3.5 per cent for the year but it has ended up closer to seven per cent.

When economists set out their forecasts for inflation in 2022, no one could have foreseen impacts such as Russia’s invasion of Ukraine, which launched in February and disrupted critical supply chains for commodities such as oil and wheat throughout much of the past year.

Brown adds it’s also now evident that economists underestimated some inflation pressures such as the demand for services like travel and dining out when economies reopened from COVID-19 lockdowns. Ongoing effects from the pandemic, meanwhile, such as shortages of labour and of critical inputs such as semiconductors, continued driving up the costs of international goods like vehicles.

“When we look at what’s been driving inflation this year — energy, food, goods from abroad — it’s all been these external factors that, really, the Bank of Canada couldn’t do anything about,” he says.

“If it wanted to get inflation of two per cent this year, it would have had to raise interest rates by, say, five percentage points overnight, if not more, to just absolutely kill the domestic economy.”

The Conservative Party of Canada has accused the federal Liberals of driving inflation through overspending, while the NDP has charged the government with failing to do enough to support Canadians through the rising cost of living.

Chrystia Freeland, the deputy prime minister and minister of finance, has pushed back against criticisms that the Liberals overspent, saying in the fall economic update that the feds are keeping their “powder dry” while only rolling out targeted supports for Canadians hit hard by inflation.

For his part, Bank of Canada governor Tiff Macklem has admitted in retrospect that lifting the pandemic’s economic stimulus sooner could have limited inflation.

StatCan’s CPI is a catch-all for a basket of goods representative of a typical Canadian household, but the cost of certain items in that basket has only continued to accelerate.

Grocery prices, for instance, were up 11.4 per cent in November, with many of the costs of consumer staples accelerating well past that mark.

There have been many reasons for surging costs at the grocery store, according to a recent breakdown from StatCan.

The invasion of Ukraine has driven costs higher on inputs such as gas and fertilizer as well as on wheat and other grains, the report said, with the war centred in a part of Europe known colloquially as the world’s bread basket.

Elsewhere, the COVID-19 pandemic forced shutdowns of food processing facilities in 2022, and reduced output throughout the supply chain drove up prices on the limited food that was being produced, StatCan said.

All the while, grocery giants saw their profits surge, drawing accusations of “greedflation” from Canadian shoppers and the federal NDP, which called for a Competition Bureau investigation into prices.

Ipsos polling conducted for Global News throughout 2022 showed Canadians were increasingly anxious about putting food on the table amid the rising cost of living.

Almost half (47 per cent) of respondents to the December poll said they had cut spending in the past year, and more than a quarter (27 per cent) said they had reduced spending on staples like food and clothing to afford other essentials and make ends meet.

One of the reasons why Canadians are having to make hard choices about spending amid inflation is that their wages have not kept pace with the rising cost of living.

While StatCan data shows average hourly wages have grown at rates above five per cent annually over the past seven months, Canadians by and large have not seen their pay rise to match inflation.

“It’s important to keep in mind that those are kind of real reductions in the purchasing power of workers,” says Iglika Ivanova, senior economist with the Canadian Centre for Policy Alternatives in B.C.

“Especially in this year, with these enormous increases in the cost of living and even higher increase in the cost of food and the cost of basics like rent or transportation, that people earning more modest incomes have really been squeezed, for lack of a better word.”

Beyond just the ability to afford necessities, inflation has made it especially harder for families to keep pace and give their kids a healthy life.

Ivanova and the CCPA track what wages residents in B.C. need to not just subsist, but to provide a basic standard of living for their family.

That calculation, called the living wage, outpaced inflation for residents of Metro Vancouver in 2022, surging 17.4 per cent annually to $24.08 per hour. A third of two-parent, two-child families in the city are making less than that hourly wage, according to the CCPA.

Ivanova explains that the surge in the living wage this past year is because inflation has hit particularly hard in areas critical to healthier living, such as fresh fruit and vegetables.

“The reality is that the healthy food (price) is just going up by more,” she says.

While the Bank of Canada has acted rapidly to raise interest rates to cool inflation — the benchmark rate rose four percentage points from March to December of last year, one of the fastest tightening cycles in its history — that hasn’t necessarily made life more affordable.

Mortgage costs for homeowners were up 14.5 per cent in November as interest rates bit, according to Statistics Canada.

Rent, meanwhile, surpassed an average $2,000 per month nationally in November. With StatCan’s rental index rising more than seven per cent in B.C. and Ontario last month, the agency pointed to higher interest rates creating a barrier for entry to the ownership market as putting more pressure on rents.

Ivanova says the pace at which rents are rising in Metro Vancouver can’t be adequately fixed merely by higher wages for renters.

“Rent is becoming a real crisis,” she says. “Without significant action on housing affordability, we’re never going to catch up. The cost of housing specifically will just overwhelm the family budgets of lower earners.”

Barring unforeseen events like Russia’s invasion of Ukraine this past year, most economists, big banks in Canada and the central bank see inflation declining through 2023, with the Bank of Canada forecasting that inflation return to its two per cent target by the end of 2024.

The first interest rate increases of the current cycle began in March 2022, but economists say it typically takes between 12 and 18 months for the full impact of central bank rate hikes to make their way through economy.

Consumers themselves are skeptical high prices will be tamed this year, according to Ipsos polling from December, which showed 67 per cent are somewhat or very pessimistic that the Bank of Canada will hit its two per cent target for inflation.

Capital Economics has a rosier outlook for inflation, albeit due to a possible economic storm on the horizon. Brown’s forecast calls for inflation to drop back down to two per cent this year amid a “moderate recession” in Canada.

But he says Canadians should already be encouraged to see agriculture commodity prices, as well as oil and natural gas prices, dropping in recent months. Car prices should start to drop as well as supply shows signs of improvement, he adds.

The 2023 food price report from the Agri-Food Analytics Lab at Dalhousie University shows that food prices may moderate from their current acceleration, but are still expected to grow at a rate of five to seven per cent next year.

The “big uncertainty” lies in Canadians themselves, Brown argues, and their demand specifically for services.

While he doesn’t expect a repeat of the rush to travel that the reopened economy saw in 2022, he says if wage growth keeps its momentum and Canadians find extra dollars to spend on the kinds of experiences they missed during the pandemic, these forces could be a “concern” for the Bank of Canada, which could lead it to continue raising interest rates.

“I think there are reasons to be encouraged about the outlook, but it is still too soon to say we’re heading back to a low-inflation world,” Brown says.

Economist Armine Yalnizyan told Global News recently that while businesses are quick to pass higher costs on to consumers, it can take longer for prices to fall.

Even when commodity prices and other inputs decline, she says businesses won’t have to drop their own prices until consumers decide they’re unwilling to pay the going rate — breeding competition among those willing to fight for Canadians’ scarce dollars.

“Because of people having less money and looking for a deal and knowing that somebody is going to offer a price cut somewhere, that reintroduces competition,” she says.

“But I think we all know that prices don’t come down as fast as they go up.”