Tough months ahead for Canadians amid inflation, rate hikes

As Canadians face a double whammy of skyrocketing inflation and the largest interest rate hike seen in 24 years, one expert is warning that prices won’t be coming down anytime soon.

Carleton University economics professor Vivek Dehejia says there may be “some relief” in sight, but not a whole lot, and expects a “tough six months to a year for average Canadians.”

He says the pressure points that played a big role in pushing inflation to a near 40-year high “are still in play,” namely ongoing supply chain disruptions, labour shortages and the war in Ukraine, which is driving fuel and food prices up, with no end in sight.

The Bank of Canada increased its key interest rate by one percentage point Wednesday as inflation in the country runs well over 7%.

In his opening statement Wednesday, Bank of Canada governor Tiff Macklem acknowledged that “higher interest rates will add to the difficulties that Canadians are already facing with high inflation,” but said the decision to front-load increases now is short term pain that is necessary to bring inflation down for the long term.

“People are unsure of what they need to do to really get on top of this,” said Gursharon Singh, credit counsellor with Credit Canada.

Traditional strategies like cutting expenses, money management and extra sources of income might not be enough to help with the double-edged sword of high interest rates and inflation, she said, especially as Canadians remain saddled with debt.

“But finding ways to pay down principal balances of debt is imperative right now.”

Canadians owe $1.83 in consumer debt for every dollar of household disposable income they have, according to Statistics Canada.

There have been several periods over the last 60 years when soaring inflation combined with aggressive interest rate hikes have led to a recession, but CIBC economist Katherine Judge doesn’t expect “a full-blown recession” this time around.

Instead, she anticipates a few “below-potential quarters of GDP growth.”

“The environment is different today because central banks have much more credibility and transparency. Also, there have been decades of around 2% inflation for households and businesses to get used to and to help anchor inflation expectations,” she said.

Judge is not expecting a scenario where inflation expectations get to a level where the central bank has to hike interest rates so much that the economy goes into a deep recession.

The Bank of Canada said Wednesday that it expects to reach its inflation target of 2% by the end of 2024, with inflation easing to about 3% by the end of next year.

But if inflation stays higher for longer than that, the political and economic dynamic could start to shift, said University of Ottawa political science professor Jacqueline Best.

“We could start seeing more pushback from workers as they try to find a way to make up for declining real wages,” she said.

“At the present, we aren’t seeing much wage-push inflation, the way we saw in the 1970s and 1980s. Working Canadians just don’t have the same leverage to demand wage increases today that they did back then when we had much higher rates of unionization and cost of living clauses in many contracts.”