When will inflation peak? Here’s what economists have to say

Experts predict that Canadians will have to endure the rising inflation for a while before prices fall.

“We may not see the peak for another couple of months,” Sal Guatieri, director and senior economist at BMO Capital Markets, told CTVNews.ca. “At least in the near term, I don’t think we’re going to get to see much relief on the inflation front.”

Statistics Canada released this week a report said Canada’s year-over-year rate of inflation hit 7.7 per cent in May, the highest it has been since 1983.

The ongoing conflict in Ukraine and its effect on gas prices are two of the main reasons for the inflation increase.

“We need to see energy prices, oil in particular, pulled back on a sustained basis before we get any meaningful relief,” Guatieri said. “Because energy costs don’t just hurt at the pump, but they’re also the key driver of input costs for basically all commodities and transportation distribution networks supply chains.”

Amy Peng, associate professor of Economics at Toronto Metropolitan University said that another factor hiking up inflation is Canada’s longstanding ties with the United States. She said as long as inflation continues to climb in the U.S., it will also rise here because of how integrated our two countries’ economies are.

“Notice that their Federal Reserve Banks make the decision first and we follow, right?” she said. “So we always have this lag effect.”

Inflation in the U.S. currently hovers around 8.6 percent. The U.S. raised their interest rate by 0.75 % on June 15. It now ranges from 1.5 to 1.75 percent, the largest increase since 1994. The Bank of Canada last raised the country’s interest rate to 1.5 per cent on June 1.

“The way [to curb] inflation is to continue raising the policy interest rate, so they have been doing that continuously this year,” Peng saidShe also said that Canada’s interest rate will rise to 2.25 per cent within the next few days, the largest increase since 2008.

This hike, Peng saidCanada would see an increase in inflation of around 8.5% over the next few months, making it comparable to the rate in America.

Guatieri is the one who will make Canadians shiver at the thought that the economy could get worse this summer. said it’s likely the only way out of this economic downturn.

“Unfortunately, we’re going to need to see some destruction,” he said. “It does imply a much weaker economy over the next year, but that is kind of the medicine to cure high inflation.”

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Peng said while the peak in Canada’s inflation has yet to happen, continued rises in inflation could impact consumer spending enough to see Canadians buying less, which will in turn begin to bring inflation back down.

“How much is it affecting people’s spending habits, spending patterns?” she said. “If this is enough to have an impact on the demand side of the economy that you eventually want to see, [there is] a possibility for inflation finally to come down with it.”

Armine Yalnizyan (economist and Atkinson Fellow for the Future of Workers), says that consumer demand is not slowing, even though prices on non-essentials are also rising.

“The thing that really took me aback with [the Bank of Canada’s inflation announcement] was the degree to which we’re back to discretionary spending, pumping up the overall price level,” she told CTVNews.ca, in reference to increased spending in flights, hotels and other forms of recreation as pandemic-related restrictions lift in Canada.

“Basically, people want to party and people want to travel, and there’s just not enough supply and it’s cranking up prices.”

But Yalnizyan said the Bank of Canada’s attempts to lower demand through higher interest rates is already working in one industry: the housing market.

“The only part of inflation they contain is the demand for housing by raising the prices of it, so you’re pricing out more buyers,” she said.

According to the Canadian Real Estate Association, Canada’s housing market has cooled in May. saidA report was released June 15. The report saidExperts have found that home sales declined by almost 22% since last year and nearly 9 percent between April and May. said was a product of the Bank of Canada’s interest rate hike negatively impacting those with a mortgage or hoping to get one.

“And when you do that, when there’s less demand, usually you see some kind of reduction in the pressure for prices to keep going up,” Yalnizyan said.

Guatieri is another method to reduce demand. saidThe goal is to increase supply. Production companies around the globe face major geopolitical obstacles.

“It’s not like producers are going to ramp up production of motor vehicles and furniture and all these other items because of the ongoing supply disruptions, partly because of the war in Ukraine, partly because of local lockdown in China,” he saidFurthermore, supply is also being affected by labour shortages.

Yalnizyan saidThe end of the war in Ukraine, ending the pandemic and real progress on addressing climate change are all critical to reducing inflation and improving supply.

“For 100 years, you’d have to go back to the beginning of the 20th century and the collision of the Spanish Flu with the First World War to see this,” she said. “And then we didn’t have things like extreme climate events on top of it. So we’ve just got all these things that are slowing down supply.”

Peng will not be affected by any inflation rate increases. said the results could be “devastating” to Canadians.

“We haven’t seen this since 1983, where we have inflation at this level. I don’t recall if you remember, but the interest rate was around 10%, and the mortgage rate was above 20%. That’s crazy,” she said. “We cannot live like that. … It’s going to be what will crash our economy.”

Yalnizyan also points out that different socioeconomic groups are affected in different ways by economic downturns. She says that consumer demand is increasing. saidThis may be due to those who have still enough income to make ends meet.

“I think we’ve got some very difficult months coming up,” she said. “Not for people that have got extra money, but for people that were struggling before this all began. We’re looking at income inequality that has morphed into consumption inequality that is actually challenging people’s quality of life.”

With files from Canadian Press