Canadian inflation remains high despite the consumer price index (CPI) falling to 7.6% in July compared to 8.1% in June. Inflation may have reached its peak now that we are seeing a decline in gasoline prices, global shipping costs, and key agricultural commodities such as wheat. However, inflation is likely to stay elevated for a while as global factors continue to fuel inflation. Supply chain disruptions, geopolitical tensions, and volatile commodity prices are some of these contributors.
Now that traveling and businesses are fully operating with eased COVID-19 restrictions, Canadians have increased the demand for goods and services. With limited supply to keep up with the demand, inflation remains above target.
Tiff Macklem, the governor of the Bank of Canada (BoC), explains that increasing the policy rate will raise the borrowing costs across the economy - for things like personal loans, car loans, and mortgages. If borrowing costs are high, consumers tend to borrow and spend less. Inflation will ease once we reach a sustainable balance between supply and demand. The housing market is a prime example to see how this works. In response to higher mortgage rates earlier this year, we have seen a slowdown in new listings and housing sales. This trend is likely to continue with the expected rate hikes in the coming months.
Canadians have been faced with the challenge of keeping up with the rising costs due to inflation and high-interest rates. This period of uncertainty is daunting for many - however, what goes up will eventually come down. Tiff Macklem reminds us that raising borrowing costs in the short term will bring inflation down in the long term. The central bank will continue to be aggressive with tightening monetary policy until inflation is back at the 2% target. The current overnight lending rate is sitting at 2.5%, and we are expecting either a 50 bps (basis points) or a 75 bps increase in the next announcement on September 7th.
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