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CHARTING A COURSE FOR INFLATION The Bank of Canada bases its targets on seasonally-unadjusted metrics of inflation, including headline and core measures. It turns out, however, that inflation is quite seasonal.
When it comes to inflation, it’s important to remember that it is expressed as a percentage, year-over-year calculation. So the headline inflation rate is influenced not just by what prices are doing today, but also what was happening at the same time last year. This is, in large part, why inflation has been falling in 2023: prices have been increasing but at a slower pace than they were last year. This is also why the path forward for inflation is less clear: not only did prices not increase very much in the second half of 2022, they didn’t increase at all from July to December. This means that for inflation to fall in the coming months, we would need to see actual price decreases—in other words, deflation—in Canada. Looking back historically at the rate of inflation between the first and second halves
of the year, it turns out inflation is quite seasonal. To put it simply, annual inflation is like your washing machine: front-loaded. Since 2001, the rate of inflation has been higher in the first-half of the year than in the second 86% of the time. Further, 41% of the time, the second half of the year has actually been characterized by deflation —most recently in 2018. All told, on average, 91% of the contribution to annual inflation occurs in the first half of the year. So as we move through the balance of 2023 and into 2024, it’s worth keeping seasonality in mind in discussing where inflation is headed. While deflation in the coming months is by no means a given, particularly when considering what gas prices have been doing of late, it wouldn’t be without historical precedent.
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