Statistics Canada reported earlier this week that the headline inflation rate fell last month to 5.9 per cent from 6.3 per cent in December, a decline that can be explained by a “base-year effect.”
After a steep and rapid climb in prices, Canada’s inflation rate is expected to fall significantly this year, giving comfort to economists worried about untamed price growth but little relief to Canadians who have fallen behind.
Inflation, which first began creeping higher in 2021, took off dramatically last year and peaked at 8.1 per cent in the summer.
That’s well above the two per cent inflation target the Bank of Canada is supposed to maintain.
The run-up in prices was sparked by what Desjardins’ chief economist Jimmy Jean called a “perfect storm” — the reopening of economies after COVID-19 restrictions, the Russian invasion of Ukraine and the disruptions in supply chains.
As that storm continues to dissipate, price pressures have relented, giving glimmers of hope that normalcy in price growth may be restored.
Those glimmers are now more apparent in the data. Statistics Canada reported earlier this week that the headline inflation rate fell last month to 5.9 per cent from 6.3 per cent in December, a decline that can be explained by a “base-year effect.”
A base-year effect refers to the impact of price movements from a year ago on the calculation of the year-over-year inflation rate.
Simply put, it means prices today aren’t rising as fast because they’re being compared to already elevated prices a year ago.
Given much of the acceleration in price growth happened in the first half of 2022, the federal agency said the annual inflation rate will continue to slow in the coming months.
Economists tracking month-over-month changes in prices have noticed price pressures easing for a while now.
But as base year effects fade, that deceleration will be more obvious to Canadians who may only be familiar with the annual inflation rate.
Looking ahead, the Bank of Canada is forecasting inflation will fall to about three per cent by mid-year and back down to two per cent in 2024. Most private sector economists are forecasting similar figures as well.
The forecasts come with a major caveat, however: Canada must be spared from unexpected global events that could cause another rise in inflation.