Rising inflation and interest rates are hurting the purchasing power of Canadians, especially low-income households, starting in 2022. new report This was announced by the parliamentary budget officer.
However, wealthy households have seen their purchasing power rise primarily due to investment income.
Over the long term, the average purchasing power of Canadian households has increased by 21% since the last quarter of 2019.
Parliamentary budget officer Yves Giroux said in a report that government transfers, wage increases and net investment income supported the increase.
“However, this conclusion does not provide a complete picture of recent changes in purchasing power in Canada,” the report states. “Indeed, it is widely accepted that inflation and the associated tightening of monetary policy have a disproportionate impact on household purchasing power depending on income level.”
For low-income households, “small increases in income were not enough to offset the effects of inflation on purchasing power.”
According to the report, households experienced an average price increase of about 15% for a common basket of goods and services during this period.
Spending on food, housing and transportation accounted for more than three-quarters of inflation, but these categories accounted for less than half of total spending in 2019.
The report noted that inflation began to heat up in 2021, as raw material costs and supply chain disruptions weighed on prices.
As inflation accelerated sharply in 2022, household purchasing power declined. Meanwhile, the Bank of Canada rapidly raised its key interest rate from its pandemic-era lows to 5% by mid-2023, before stopping it.
Canada’s inflation rate has slowed to 2%, reaching the Bank of Canada’s target for the first time since 2021. This slowdown has also sparked debate over whether more aggressive rate cuts will follow.
The consumer price index reached a record high of 8.1% in June 2022, but has since slowed under the weight of interest rate hikes by the Bank of Canada.
The report said higher interest rates weighed on many household budgets by increasing the cost of mortgage payments, but also contributed to an increase in investment income.
Investment income for the richest 20% of households grew faster than interest payments, leading to a net increase in income that outpaced inflation in 2023 and increased purchasing power.
For other households, the increase in interest payments was, on average, higher than last year’s investment income.
As a result, purchasing power stagnated for households in the third and fourth quintiles, and decreased purchasing power for low-income households.
“In summary, purchasing power for most households remains higher in the first quarter of 2024 than in the final quarter of 2019,” the report said.
“However, from 2022 onwards, rising inflation and monetary tightening are hurting purchasing power, especially for low-income households.”
