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Canada inflation rate: BoC’s focus on timely data aims to minimise overshoot risk but CPI remains above target

By Fitri Wulandari

Edited by Jekaterina Drozdovica

15:28, 16 November 2022

Woman holding Canadian dollars in her hands.
Will new inflation measures help the Bank of Canada? – Photo: Shutterstock; Kamil Zajaczkowski

The Bank of Canada (BoC) shifted its focus on more timely core inflation data as it seeks to slow the pace of interest rate hike. The shift to transitory indicators in the Consumer Price Index (CPI) was expected to help the central bank to set the right pace of its tightening cycle

However, the inflation rate has stubbornly stayed well above the BoC target. What will be the outlook for the Canada inflation rate?

What is inflation and how is it measured in Canada? 

Inflation refers to the gradual increase in the prices of goods and services. It also reflects the decrease of purchasing power of money. As a result, when prices rise, consumers can buy less with the same amount of money. The decline in purchasing power can depress economic growth .

Statistics Canada calculates the country's Consumer Price Index (CPI). It divides the CPI basket of goods and services into eight components: 

  • Food

  • Shelter

  • Household operations, furnishings, and equipment

  • Clothing and footwear

  • Transportation

  • Health and personal care

  • Recreation, education, and reading

  • Alcoholic beverages, tobacco products, and recreational cannabis

Statistics Canada collects the prices of nearly 518 goods and services to represent price movement in 180 classes in order to calculate CPI inflation. Sample goods and services are chosen for their representativeness and expected continuous availability.

The BoC sets an inflation target at 2% inside the control range of between 1% and 3%.

In October 2022, the BoC announced three measures of core inflation which the bank said will better reflect the underlying trend of inflation. The three measures are:

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  • CPI-trim, which excludes CPI components with the highest rates of change in each month.

  • CPI-median represents the price change at the 50% percentile of the distribution of price changes (in terms of basket weight),

  • CPI-common tracks common price changes across categories in the CPI basket using a statistical method.

Inflation in Canada: Historical context

From September 2017 to March 2021, inflation in Canada hovered within the target range of 1% to 3%, Canada inflation rate history data showed. 

Over 2020, the inflation rate in the North American country fell to below 2%, with deflation recorded in April (-0.2%) and May (-0.4%) as Covid-19 pandemic restrictions shifted consumer spending patterns, according to Canada’s statistics office. 

In 2020,  inflation in Canada averaged 0.7%, driven by higher food prices – gasoline and semi-durable goods prices fell as Canadians reduced travel and stayed home. 

The pace of price rise accelerated to above the upper target range in April 2021 at 3.4% and reached 4.8% in December 2021. Overall, CPI inflation in Canada averaged 3.4% in 2021, the fastest pace since 1991, according to Statistics Canada. Core inflation, excluding energy, averaged 2.4%. 

Canada's inflation rate

Inflationary pressures were exacerbated by a combination of pervasive global supply chain constraints and pent-up consumer demand as the economy reopened due to the widespread Covid-19 vaccine rollout.

Transportation experienced the fastest price increase, owing to rising global oil prices. In 2021, Canadian drivers paid 31.2% more at the pump on an annual basis.

Inflation continued its upward trend in 2022, hitting 8.1% in June, its highest in 39-years. The soaring energy price was the biggest contributor as global oil and gas prices jumped to multi-year highs following Russia’s invasion of Ukraine. 

According to Canadian statistics, drivers in June 2022 paid 54.6% more for fuel after a 48.0% increase in May.

Factors driving inflation Canada

The current inflation rate in Canada stood at an annual rate of 6.9% in September, slowing from a 7% increase in August, but it was still higher than market expectations. Core inflation, excluding food and energy prices, increased by 5.4% in September, compared to 5.3% in August.

CPI, excluding food and energy prices, rose 0.4%, seasonally adjusted on the month, compared to a 0.1% increase in August.

Karyne Charbonneau, Economics Executive Director at Canadian Imperial Bank of Commerce (CIBC), wrote in a note on 19 October:

“The Bank of Canada has clearly not slayed the inflation dragon yet. The pace of growth in seasonally adjusted inflation excluding food and energy picked up by more than expected this month and is too high for comfort.”

In October, the BoC lifted its policy rate by 50 basis point (bps) to 3.75%. The central bank has raised its policy interest rate six times since it started the tightening cycle in March 2022 for a total of 325 bps. 

Charbonneau added that the BoC may have to hike its policy rate by 25 bps in December, if inflation growth numbers support it.

High input costs accelerate food inflation

Food inflation was the biggest contributor to keep all-item CPI elevated, while fuel prices dropped as global crude oil prices retreated to the $90 per barrel level from their high of $130l in March. 


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According to Statistics Canada, the cost of food purchased from stores increased 11.4% in September, the fastest YoY rate since August 1981 (+11.9%). Since December 2021, the cost of groceries purchased from stores has risen more quickly than the CPI for all items 10 times in a row.

The biggest price increases happened to food products that required more processing, such as bakery, cereal products (including pasta) and condiments, according to the BoC in its October 2022 Monetary Policy Report

Factors that contributed to high food price inflation included the sharp rise in agricultural commodity prices since mid-2020, as well as high distribution costs and increases in processing costs, including labour and energy input costs. Record highs natural gas prices stemming from the war in Ukraine, for example, had increased fertiliser prices.

“Moreover, the past increase in commodity input costs is still being passed on to consumers,” BoC said. However, the bank anticipated that the recent drop in the price of agricultural commodities would lessen the pressure on food inflation in the upcoming year.

Tight labour market pushes up inflation

According to Statistics Canada, the labour market in Canada has remained tight, with the unemployment rate steady at 5.2% in October. It was 0.3 percentage points higher than the all-time low of 4.9% in June and July and one of the lowest rates in 40 years. Average hourly wages rose 5.6%, compared to a year ago in October. 

The BoC said in the report:

“The strong labour market and persistent capacity constraints indicate that there is still substantial excess demand in the Canadian economy. The labour market continues to be tight across a broad range of measures, suggesting that it has surpassed maximum sustainable employment.”

Tightening cycle pushes up mortgage costs

The costs of paying mortgage interest rose by 8.3% in September, compared to -9.2% a year ago, as Canadians renewed or started to take up mortgages at higher interest rates amid the BoC’s tightening cycle. 

It marked the third consecutive months of mortgage cost increase.  Mortgage costs account for 11% of Shelter components in the CPI basket. 

Weakening Canadian dollar keeps inflation elevated

The Canadian dollar has appreciated in recent weeks against the US dollar. However, overall the Loonie – as the currency is popularly known – has been under pressure from the stronger greenback (USD/CAD) as the US Federal Reserve (Fed) has maintained its aggressive tightening stance. 

The BoC said in its Monetary Policy Report:

“The recent depreciation of the Canadian dollar provides a modest boost to import prices and inflation in 2023.”

As of 16 November, the USD/CAD pair has dropped 4.56% in one month, reflecting depreciating US dollar against the Loonie. However, the currency pair is 4.85% higher year-to-date (YTD) – a 5.85% gain year-on-year.

USD/CAD live exchange rate

Analysts at Bank of America (BofA) Global Research commented on 26 October:

“The CAD would likely remain weak vs the USD in the near-term as the BoC diverges from the Fed rate hike path and risk premium remains elevated. However, we believe the CAD could start to rally in 2023 as the Fed gets closer to the terminal rate and the effect of tighter monetary policy becomes more apparent in the US.”

Canada inflation forecast

In the October 2022 Monetary Policy Report, the Bank of Canada expected inflation to reach 7.1% in Q4 2022, slow to 2.8% in Q4 2023 and hit the 2% target in Q4 2024. The bank said:

“Inflation falls as the effects of past increases in commodity prices dissipate and the inflationary pressures from global supply disruptions fade. The rise in interest rates slows spending, reduces demand and helps return inflation back to target.”

The Bank of Canada and analysts projected inflation in Canada to ease within BoC’s target range of 1%-3% starting from 2023. 

As of 14 November, ING’s Canada inflation forecast for 2022 projected inflation to reach 6.6% in Q4 2022 and ease to 5.2% in Q1 2023. 

The Amsterdam-based multinational bank predicted Canada’s inflation to average 3.1% in 2023, dropping from an estimated 6.7% in 2022. It was expected to ease further to 1.9% in 2024, before rising slightly – but within the BoC inflation rate target range – at 2.2% in 2025.

CIBC, as of 20 October, forecast all item CPI inflation in Canada to stand at 7% in Q4 2022 year-over-year (YoY), down from a peak of 7.5% in Q2 2022. 

The bank expected the Canada inflation rate to ease to 5.5% in Q1 2023 and continue its downward trajectory over 2023, falling to 2.1% in Q4 2023. On an annual basis, the CIBC projected Canada’s inflation rate to average 6.9% in 2022, decelerating to 3.2% in 2023. 

Final thoughts

Keep in mind that analysts’ predictions can be wrong. You shouldn't use them to substitute your own research. Always perform your own due diligence before trading, looking at the latest news, a wide range of commentary, fundamental and technical analysis.

Remember, past performance does not guarantee future returns. And never trade money that you cannot afford to lose.


Is inflation high in Canada?

Canada’s inflation rate has slowed to 6.9% in September 2022, dropping from an 8.1% increase in June. However, it was still well above Bank of Canada’s inflation rate target range of 1% to 3%

Will there be a recession in Canada?

In October 2022 Monetary Policy Report The Bank of Canada forecast the country’s economic growth to range between flat to 0.5% through the end of 2022 and H1 2023. While it suggested that a growth of slightly below zero for a couple of quarters was likely, BoC refrained from making recession calls. Note that analysts’ predictions can be wrong.

Was Canada affected by the 2008 recession?

Yes. Canada was affected by the 2008 financial crisis, but less severely than the US and Europe. It did not have bank failures or bailouts such as in the US.

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