The August consumer price index (CPI) inflation rate was released this week and it’s up to 4.1%. The last time the rate was higher was in March, 2003 (4.2 per cent). Probably the biggest factor in this year ’s inflation surge is simply the reality that consumer prices fell to unusual lows last year, and it’s against these low prices that we are measuring the current price environment.
But from a broader historical perspective, 4.1% is, comparatively, nothing. Inflation was north of 10% in the mid-1970s and again in the early 1980s. In the early 1990s, when the Bank of Canada formally adopted maintaining low and steady inflation as its primary monetary policy objective, inflation still hovered around 5%. But since the central bank set its inflation target at 2% in 1995 – using interest rates to help steer inflation toward that rate – inflation has averaged very close to that target.
Interest rates are considered the bigger weapon to slow inflation, but the bank has said that it doesn’t want to turn to rate hikes until the economy has returned to full capacity. The exact moment when interest rates start to rise will be determined by economic indicators such as employment bounce back and whether inflation goes down on its own, but the Bank of Canada is currently projecting it will hike rates next year. It will also inevitably be influenced by what the U.S. central bank does, simply because getting too far out of sync with U.S. rates affects the loonie and our exports.
Interest rates certainly have an impact on the price of houses. They had a strong upward effect on house prices as rates fell, and the opposite will almost certainly happen if interest rates begin to rise. In Canada’s hottest markets, including Greater Vancouver and Toronto regional housing data released early this month showed little sign of cooling in August.