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EX-FLATION Inflation can be sliced and diced in myriad ways—with some measures revealing inflation that’s already back to target.
The Consumer Price Index–the basis for calculating inflation– is made up of a basket of goods and services designed to be broadly representative of the things that Canadians buy. By measuring the changes in price of the inputs into the basket and weighting them according to the relative proportion on which they’re bought, Statistics Canada comes up with an estimate for how much prices are changing, which when annualized gives us the rate of headline inflation. Simple, right? Of course there are going to be drawbacks to any methodology used to calculate inflation. For one, everyone’s spending patterns are different, so your own personal rate of inflation will be different. For example, if you’re someone who buys lots of pineapples and the price of pineapples is rising quickly, your personal inflation will be higher than someone who is pineapple intolerant. There are other drawbacks too, and it’s why the Bank of Canada looks at more than just the headline rate. Some prices are extremely volatile, like energy and specifically gasoline, so when stripped out you can see more stable
price changes. Inflation excluding energy peaked much lower in 2022 than the overall rate, at 6.3%, as energy was increasing much more quickly at that time. Most recently in January, inflation excluding energy was higher than overall inflation at 3.3% as energy prices have actually been decreasing of late. Another issue is that high interest rates are— somewhat counterintuitively—contributing to higher inflation. When you calculate inflation excluding just mortgage interest, the annual rate was actually 2.0% in January, right on the Bank of Canada’s target. And beyond that, when you take out shelter (which accounts for 30% of the basket) inflation is below target at 1.5%. The reason shelter is pushing up overall inflation is two-fold: interest costs and rents are both increasing rapidly, both of which are being influenced by high interest rates. This isn’t to say that without high interest rates inflation would have come back down on its own, but rather to highlight that much of the inflationary pressures experienced in the past two years have abated, as new challenges emerge.
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