Why Are Prices So High In Canada?

August 26, 2024 12:00 AM EDT | By Team Kalkine Media
 Why Are Prices So High In Canada?
Image source: shutterstock

Many Canadians are hopeful that the end of economic turbulence is approaching. In June 2024, the central bank reduced its key overnight rate by 0.25% after a series of 10 significant rate hikes between March 2022 and July 2023. Despite this, mortgage rates remain high, especially for those renewing in 2024. However, there are signs of improvement in the housing market following a quiet 2023.

Recent Economic Updates

Bank of Canada Cuts Key Interest Rate

The Bank of Canada’s series of interest rate hikes appears to have helped control inflation without severely impacting the economy. The bank had previously lowered the overnight interest rate from 1.75% to 0.25% in March 2020, where it stayed for two years. Rates increased to 5% between March 2022 and July 2023, the highest since 2001.

Inflation, as measured by the Consumer Price Index (CPI), is currently at 2.9%, down from a peak of 8.1% in June 2022, but still above the BoC's 2% target. The BoC has indicated that further rate cuts may follow if inflation continues to trend downward. Recent CPI figures showed a slight unexpected increase, which has introduced some uncertainty about future rate changes.

With the rate cut, Canadian banks have begun lowering their prime rates. TD Bank's prime rate for mortgages is now 7.10%, while other major banks have set their prime rates for all loans at 6.95%.

Food Prices Show Signs of Easing

Food prices have been high, but there is a noticeable slowdown in their growth. In May, grocery prices increased by 1.5% year-over-year, a decrease from previous months. The projected increase of 2.5% to 4.5% for 2024 suggests some relief from previous years' higher food inflation. However, despite the slower rate of increase, many Canadians are still cutting back on food quality and quantity due to high prices.

Economic Outlook and Recession Concerns

Economists and banks have been cautious about the possibility of a recession since the BoC's rate hikes began. A reduction in inflation to the BoC's 2% target typically requires decreased spending and a slowing economy.

In his June 2024 press conference, BoC Governor Tiff Macklem noted that the Canadian economy appears to be heading towards a soft landing. Economic growth has picked up slightly, and there is moderate growth in consumption, business investment, and the housing market. Macklem described the situation as a "soft landing" but emphasized that while progress is being made, the final outcome is not yet certain.


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