The Bank of Canada (BoC) closely monitors the rate of inflation in Canada and aims to keep it within a target range (more on this below).
Following May’s higher-than-expected inflation reading, the latest data is welcome news for Canadians who hope the BoC will cut its benchmark interest rate at its next rate decision on July 24. In June, the central bank dropped its key interest rate for the first time in four years, from 5% to 4.75%.
Read more about inflation
What does inflation mean?
Inflation is the rising cost of goods and services, which leads to a decrease in the purchasing power of money.
Say you have $10. Last year, a can of tomato sauce cost $5, so you could afford two cans. But the cost per can has risen to $6.50, which means now you can only afford one. Over time, you’ll be able to purchase fewer and fewer things with the same $10 of income. When your income growth does not rise in sync with inflation, your purchasing power erodes and your standard of living decreases.
What is a good rate of inflation?
Some people think we should aim for 0% inflation. However, most economists, the BoC and other central banks see some inflation as desirable and reflective of a healthy economy. The BoC manipulates the Canadian money supply, as well as interest rates, to maintain a target rate of 2% inflation—the midpoint of its inflation-control target range of 1% to 3%.
Inflation lower than 2% suggests there is an excess of supply, which means the economy is struggling; this leads to less production and fewer jobs.
Inflation higher than 2% signals that the economy is growing too quickly. Typically, this means Canadians are earning too much income—between their jobs, government benefits and other sources—and snapping up goods so fast that there are supply shortages, and therefore rising prices.
Why was inflation so high in Canada in 2023?
One of the reasons inflation is so high in Canada is that the federal government and the BoC worked together during the pandemic to increase the amount of money in circulation. The federal government spent north of $500 billion on pandemic-related benefits in 2020 and 2021, largely financed with bonds the BoC purchased. Canadians’ savings rate skyrocketed, and the median after-tax income increased 7% from 2019 to 2020, largely thanks to these programs.
Worried about deflation because of how many Canadians were losing their jobs due to lockdowns, the BoC decreased the key interest rate to a historic low of 0.25% to encourage investing and spending. At the same time, global events, such as the war in Ukraine and China’s COVID-zero policies, created supply shortages for commodities like grain and oil and reduced global production.
Inflation higher than 2% means the economy is growing too quickly? What?!
It means prices are rising faster than the economy is growing. This is such a blatant inversion of what should be basic economic understanding. Inflation erodes your purchasing power.
Canadian population growth is 6% by importing immigrants indicates that native canadians can not afford to have children due to lack of earnings by couples to meet standard of living in AI world.