Supply chain disruptions, shift in consumer behaviour keep inflation elevated in Canada

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Economists say supply chain disruptions and shift in consumer behaviour are contributing to keeping inflation at elevated levels in Canada.

Canada’s inflation rate touched 4.8% on a year-over-year basis in December, an increase from 4.7 per cent reported in November last year, according to data released Wednesday by Statistics Canada. The inflation rate is the highest the country has seen since 1991.

To put things in perspective, the Bank of Canada aims to keep inflation at the 2 per cent midpoint of an inflation-control target range of 1 to 3 per cent.

The increased inflation is in line with the economists’ expectations. “We are close to a peak for inflation in Canada,” Sal Guatieri, senior economist and director at BMO Capital Markets told CTVNews.ca in a phone interview. Senior economist at Royal Bank of Canada, Nathan Janzen, told CTVNews.ca on Tuesday that inflation could hover around the higher-end - from 4.9 per cent to 5 per cent.

Markets have remained uncertain due to the ongoing waves of the pandemic. This has been fuelled by supply chain disruptions, unfavorable climatic conditions, and shifts in consumption patterns.

Using data from Statistics Canada, CTVNews.ca created five charts and interviewed economists to help explain why inflation in Canada remains so high amid the continuing effects of the pandemic on the global supply chain.

Spillover effect due to supply chain disruption and increasing demand

During the pandemic, inflation has been driven by many factors - supply chain disruption being the major one. Global supply chain disruptions intensified, limiting production and leading to higher costs and prices.

The coronavirus has pushed many factories to shut down, resulting in clogged freight routes and limited supply across countries. This led to a surge in the prices of products such as furniture, bicycles, cars, and raw materials required by manufacturers.

Another reason for the push in prices is the bounceback in demand some industries are experiencing. Amid limited supply, demand for furniture is increasing, pushing prices further up. According to Statistics Canada, consumers who purchased household appliances such as refrigerators and freezers (+13.9 per cent) and laundry and dishwashing appliances (+10.4 per cent), paid 8.9 per cent more in December 2021 compared to the same period last year. This was the largest yearly gain since June 1982. According to an OECD Outlook released last year, the global recovery from COVID-19 has been uneven. The imbalances have created uncertainty, with more downside than upside risks. Fresh virus outbreaks have restricted mobility within regions and across borders, which means that high inflation could last longer.

Janzen said supply chain pressures were easing a bit last year but Omicron disrupted the supply flow. The disruption had a spillover effect on industries such as the automotive industry. With the new production of cars in the backlog, rental prices for vehicles and demand for used vehicles have increased. Canadians paid 5 per cent more in 2021 for new vehicles compared to a year earlier, due to the global shortage of semiconductor chips.

Guatieri said factories are closing either due to a shortage of staff because people are sick or under quarantine, and this has indirectly impacted the steady supply of raw materials that are used in the manufacturing process globally. At the same time, the cost of freight across oceans has increased due to the shortage of truck drivers, with shipments getting delayed. All these costs are getting passed on to the consumers.

A shift in consumer behavior

The year 2021 saw a shift in consumption patterns from last year. The pandemic created an unprecedented situation and significantly altered consumer behavior over a very short period of time, according to a report by Statistics Canada and the Bank of Canada.

According to the Bank of Canada, after the initial wave of the pandemic, spending on goods recovered faster than spending on services. Though the consumption of services recovered around the same time, it still remained 4 per cent below the pre-pandemic level through to the beginning of 2021. This unusual shift in consumption pattern resulted in an extraordinary strain on global shipping networks such as transportation costs and demand for shipping containers. These bottlenecks were later magnified because many businesses responded to shortages by ordering their goods not only earlier, but also in greater quantities. With demand getting stronger than expected under normal business conditions, the supply strains only intensified in 2021.

With physical distancing measures easing throughout 2021, prices for services consumed outside the home started to recover from the price shock they suffered in 2020.

As demand for air travel picked up, airfare increased. Canadians paid 24.7 per cent, mon-over-month for airfare.As borders opened up, hotel prices and airfares have started to shoot up. Guatieri said a source of upward pressure on inflation has been a rebound in some of the hard-hit service areas such as travel and car prices. Hotel costs and airfares have climbed in the past year and could be a source of upward pressure on inflation.

Food prices rise sharply due to unfavorable weather conditions and supply chain disruptions

For Canadians, prices of food across dinner tables have increased in comparison to 2020.

Food inflation climbed to 5.2 per cent in December last year from 1.1 per cent a year ago. Groceries in particular rose 5.7 per cent, the largest increase since November 2011. According to the data by Statistics Canada, prices of fresh fruits have gone up and these include apples, oranges, and bananas. Two top reasons for this surge have been the supply chain disruptions and the unfavorable weather conditions across the country.

In 2021, global food prices rise ‘sharply’, according to a recent report by United Nations (UN). The agency’s Food Price Index, which tracks monthly changes in international prices showed a 28% increase over 2020. The reason for this jump was the high cost of inputs, ongoing pandemic, and volatile climatic conditions.

The financial costs of climate change have weighed heavily on taxpayers and insurers. The insured damage by the floods in B.C. resulted in an insured loss of $515 million, the highest that year. According to a recent Canada's Food Price Report, adverse weather was cited as one of the concerns for an increase in food prices across the country. The report noted that in 2021, Canada experienced climate change-related adverse weather effects, such as severe wildfires in B.C. and drought conditions in the Prairies, that affected the prices of meat and bakery products. According to Statistics Canada, prices for bakery products rose 4.7 per cent year over year due to the drought during the summer months which reduced wheat crop yields, in turn pushing the prices on to the shoppers.

Cost of living outpaces income growth as labor markets tighten

International Labour Organization (ILO) recently downgraded the market recovery forecast for 2022, warning of a slow and uncertain recovery across the world.

On average, prices rose faster than income in Canada. Canadians experience a decline in purchasing power as the cost of living touched close to 5 per cent in the past year and wages rose by only 2.6 per cent.

Income grew twice as fast as inflation across industries that had the highest job vacancies. The number of job vacancies in Canada was at an all-time high in the third quarter of 2021, mostly across the hardest-hit industries in the pandemic. According to Statistics Canada, five sectors driving the growth in job vacancies were health care, construction, accommodation and food, retail trade, and manufacturing.

The chart below shows the top ten job occupations that saw the most job vacancies over the past two years. For licensed practical nurses, the number of job vacancies grew three-fold since 2019, with the biggest rise of 182 per cent, followed by food and beverage servers that were impacted by a series of lockdowns in the country. The average pay also increased for these job positions. The most increase in average wage was for construction trade laborers (13 per cent), followed by nurse aides (10 per cent). According to Statistics Canada, the unmet labor demand could put upward pressure on wages.

Housing is heated up

Housing is the most important of the eight major components in CPI and remains a concern for most Canadians.

“We've seen substantial growth in home prices and that is filtering into the consumer price index, as well, via things like higher realtor fees,” said Janzen. Higher building supplies are pushing up the construction costs. Data reveals that Canadian homeowners paid 9.3 per cent more for home and mortgage insurance in December 2021 than they did in December 2020. On an annual basis, accommodation prices rose faster for homeowners than renters. Gualtieri said homeowner displacements costs could be a big source in driving up inflation. With house prices accelerating, more people could be pushed into the rental market because they can’t afford a home, he added.