| || ||Craig Alexander |
Senior Vice-President and Chief Economist
The rate of inflation is projected to almost double this year, from a mere 1.0 per cent to close to 2 per cent next year—just shy of the Bank of Canada’s inflation target. However, the increase will still cost an average Canadian household roughly $1,600 more on their annual expenditures.
Higher energy costs will play a leading role in lifting inflation. Over the course of 2016, oil prices rose 45 per cent—as measured by the benchmark West Texas Intermediate crude oil price—boosting, in turn, the price of gasoline. In 2017, the gains will be sustained, but oil prices may only climb modestly from current levels. The higher price for crude will mean that Canadians will spend, on average, 10 per cent more to fill their gas tanks this year than last year. In Ontario and Alberta, the imposition of carbon pricing will add a bit more than 4 cents per litre to the cost of gasoline.
The cost of home heating and cooling will rise at a more subdued pace, increasing close to 1 per cent. However, price trends will vary by province and will be affected by carbon pricing in a number of provinces. For example, in Ontario, where high electricity prices have become a public issue, the government announced a rebate of the HST on electricity bills that will save the average household about $11 a month. But, the new carbon pricing will raise natural gas bills, costing the average household about $6 a month.
Rising food prices are expected to lift the rate of inflation. Pork and chicken will be a bit pricier, but the largest increases are expected to be in imported fruits and vegetables. Not only is it costing more to transport food to the grocery stores, it is also more expensive for food merchants to bring in imported food due to a weak Canadian dollar. The impact of higher food prices will likewise show up on the menus at restaurants.
The exchange rate will also impact prices for clothing, footwear, and electronics. However, these are goods that are still likely to decline in price. The impact of the low-flying loonie will be to reduce the discounts being offered at the retail outlets.
Another source of lower prices is likely to be found in furniture stores, which will experience weaker sales amid cooler Canadian real estate markets. The federal government’s actions to tighten mortgage insurance rules and constrain mortgage lending to highly indebted households are expected to dampen real estate activity. However, with the U.S. Federal Reserve poised to continue raising interest rates, the resulting lift to U.S. bond yields will raise Canadian bonds, which will feed through to produce higher fixed mortgage rates in Canada. Still, mortgage rates will remain historically low and the Bank of Canada is not expected to raise the overnight rate, keeping variable mortgage rates at close to current levels. Nevertheless, a further correction in Vancouver real estate, stabilization in Alberta, some moderation in home sales growth in Toronto and surrounding region, and modest sales growth elsewhere are likely to lead to weaker demand and slightly lower prices for furniture and household appliances.
Prices for cars, trucks, and automotive parts are forecast to rise a bit faster in 2017, with an increase of 2.1 per cent this year, up from 1.8 per cent last year. A similar increase is expected in the cost of transportation services.
Finally, education and health care outlays will cost more in 2017, with prices rising 2.5 per cent. These are categories that tend to rise faster than the overall rate of inflation.
Again, it has to be stressed that inflation in Canada is contained. Inflation expectations are anchored around 2 per cent, which demonstrates the Bank of Canada’s strong credibility in hitting its 2 per cent inflation target. This means that the assumption of 2 per cent inflation tends to be built into business plans and is incorporated in wages and salaries. Indeed, average weekly wages are projected to rise at roughly the same rate as inflation. More broadly speaking, after-tax household income—which includes wages and salaries, investment income, and government transfers—will modestly outpace the rate of inflation.
The main message is that inflation will pick up in 2017. Prices for goods that have been rising will rise some more. Prices for goods that get discounted will tend to be discounted by less. Higher energy prices and a weaker Canadian dollar will drive some of this story. The pace of inflation won’t pose a threat to the economy, but it does mean that Canadians will be shelling out more money for their purchases.