Over the same period, wages rose by 2.4%, a purchasing power gap exacerbated by rising costs of basic necessities like food that often hit low-income households the hardest.
Tu Nguyen, an economist at accounting firm RSM Canada, said households were already looking for ways to buy more with less, either by switching to discount stores or opting for cheaper protein instead of beef, chicken and fish which all saw faster price increases in January. compared to December.
“The more people have to spend on food, shelter and gasoline, all essential items, the less they will have to spend on discretionary items such as entertainment and travel,” Nguyen said.
“Obviously, with higher prices and wages not keeping up, households may have to cut back on spending and that in turn could hurt economic growth.”
The pressure on households is expected to worsen in the coming months as the drivers of January inflation continue.
Gasoline prices rose 31.7% last month compared to January 2021, amid growing concerns over global oil supplies linked to the threat of Russian military action against Ukraine .
Excluding gasoline prices, Statistics Canada said the annual rate of inflation would have been 4.3% in January, which the agency said was the fastest pace on record.
BMO Chief Economist Douglas Porter said gasoline prices are on the rise again this month, meaning Canadians shouldn’t expect relief when the report on the February inflation will be published.
Grocery prices in January rose 6.5% year over year – the largest annual increase since May 2009 – due to higher shipping costs linked to chain problems global supply.
Food prices are expected to rise in February due to protesters blocking major border crossings and the sharp rise in dairy prices earlier in the month, CIBC senior economist Andrew Grantham said.
House prices rose 6.2% year over year, the fastest pace since February 1990, due to rising new home prices and rent increases. Canada’s hot housing market is expected to calm if the central bank raises rates, though Nguyen said hikes alone won’t solve the problem of low supply and strong demand for homes.
The central bank has kept its key rate at 0.25% since the start of the Covid-19 pandemic in March 2020, but recently abandoned its promise to keep the rate at emergency levels.
The Bank of Canada is expected to raise rates in its next scheduled interest rate announcement in two weeks, in what is likely the first of several hikes over the year aimed at calming inflation.
In a speech on Wednesday, Bank of Canada Deputy Governor Timothy Lane said the central bank still expects inflation rates to decline rapidly in the second half of the year, but noted that inflation could, once again, prove to be more persistent.
He said the bank would use its tools forcefully, if necessary.
“Any policy carries risk, but inaction is often more risky,” Lane said in the text of his speech. “It is important to take these risks, but it is equally important to fully understand them and to be transparent in communicating their nature.”
During an ensuing question-and-answer session with the University of Calgary’s School of Public Policy, Lane said senior banking officials would also assess the potential impact of border blockades on the economy when deliberations on the path of interest rates.
The average of the three measures of core inflation, which are considered the best indicators of underlying price pressures and closely monitored by the Bank of Canada, was 3.2% in January, up from 2.93% recorded in December.
According to Statistics Canada, this is the fastest pace recorded since August 1991.